As a result of the Fed's sale of $4,500 worth of government securities to First Main Street Bank, the bank becomes reserve deficient. Suppose that Dina, a First Main Street Bank's customer, re-pays back the $4,500 loan she took out a few months ago. Which of the following most accurately describes First Main Street Bank's actions? The bank creates a $125,500 loan. The bank keeps the $4,500 as reserves. The bank keeps the $450 as reserves. The bank creates a $4,500 loan. The money supply in the economy is $
Added by Santiago C.
Close
Step 1
First, the Fed's sale of $4,500 worth of government securities to First Main Street Bank reduces the bank's reserves by $4,500, making it reserve deficient. Show more…
Show all steps
Your feedback will help us improve your experience
Maria Dearborn and 69 other Macroeconomics educators are ready to help you.
Ask a new question
Labs
Want to see this concept in action?
Explore this concept interactively to see how it behaves as you change inputs.
Key Concepts
Recommended Videos
Although the U.S. Federal Reserve doesn't use changes in reserve requirements to manage the money supply, the central bank of Albernia does. The commercial banks of Albernia have $\$ 100$ million in reserves and $\$ 1,000$ million in checkable deposits; the initial required reserve ratio is $10 \%$. The commercial banks follow a policy of holding no excess reserves. The public holds no currency, only checkable deposits in the banking system. a. How will the money supply change if the required reserve ratio falls to $5 \%$ ? b. How will the money supply change if the required reserve ratio rises to $25 \%$ ?
Majid B.
Explain whether each of the following events increases or decreases the money supply. a. The Fed buys bonds in open-market operations. b. The Fed reduces the reserve requirement. c. The Fed increases the interest rate it pays on reserves. d. Citibank repays a loan it had previously taken from the Fed. e. After a rash of pickpocketing, people decide to hold less currency. f. Fearful of bank runs, bankers decide to hold more excess reserves. g. The FOMC increases its target for the federal funds rate.
Md.Daniyal A.
Tracy Williams deposits $\$ 500$ that was in her sock drawer into a checking account at the local bank. a. How does the deposit initially change the T-account of the local bank? How does it change the money supply? b. If the bank maintains a reserve ratio of $10 \%$, how will it respond to the new deposit? c. If every time the bank makes a loan, the loan results in a new checkable bank deposit in a different bank equal to the amount of the loan, by how much could the total money supply in the economy expand in response to Tracy's initial cash deposit of $\$ 500 ?$ d. If every time the bank makes a loan, the loan results in a new checkable bank deposit in a different bank equal to the amount of the loan and the bank maintains a reserve ratio of $5 \%$, by how much could the money supply expand in response to Tracy's initial cash deposit of $\$ 500 ?$
Recommended Textbooks
Principles of Economics
Macroeconomics
Economics
Transcript
18,000,000+
Students on Numerade
Trusted by students at 8,000+ universities
Watch the video solution with this free unlock.
EMAIL
PASSWORD