if the fed sells 1 million of government bonds, what is the effect on the economy reserves and money supply
Added by Ellen R.
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When the Federal Reserve (the Fed) sells government bonds, it is essentially taking money out of the banking system. Investors or banks buy these bonds, which means they pay the Fed with their reserves. Show more…
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Suppose that the reserve requirement for checking deposits is 10 percent and that banks do not hold any excess reserves. a. If the Fed sells 1 dollar million of government bonds, what is the effect on the economy's reserves and money supply? b. Now suppose that the Fed lowers the reserve requirement to 5 percent but that banks choose to hold another 5 percent of deposits as excess reserves. Why might banks do so? What is the overall change in the money multiplier and the money supply as a result of these actions?
Suppose that the reserve requirement for checking deposits is 10 percent and that banks do not hold any excess reserves. a. If the Fed sells $\$$1 million of government bonds, what is the effect on the economy's reserves and money supply? b. Now suppose the Fed lowers the reserve requirement to 5 percent, but banks choose to hold another 5 percent of deposits as excess reserves. Why might banks do so? What is the overall change in the money multiplier and the money supply as a result of these actions?
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