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7. The reserve requirement, open market operations, and the money supply Assume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is checkable deposits. To simplify the analysis, suppose the banking system has total reserves of $300. Determine the simple deposit multiplier and the money supply for each reserve requirement listed in the following table. Reserve Requirement (Percent) Simple Deposit Multiplier Money Supply (Dollars) 20 1, 2, 5, 10, or 20 5 300, 600, 1,500, 3,000 or 6,000 10 1, 2, 5, 10, or 20 10 300, 600, 1,500, 3,000 or 6,000 A higher reserve requirement is associated with a smaller money supply. Suppose the Federal Reserve wants to increase the money supply by $200. Again, you can assume that banks do not hold excess reserves and that households do not hold currency. If the reserve requirement is 10%, the Fed will use open-market operations to buy $20.00 worth of U.S. government bonds. Now, suppose that, rather than immediately lending out all excess reserves, banks begin holding some excess reserves due to uncertain economic conditions. Specifically, banks increase the percentage of deposits held as reserves from 10% to 25%. This increase in the reserve ratio causes the multiplier to fall to . Under these conditions, the Fed would need to buy worth of U.S. government bonds in order to increase the money supply by $200. Which of the following statements help to explain why, in the real world, the Fed cannot precisely control the money supply? Check all that apply. The Fed cannot prevent banks from lending out required reserves. The Fed cannot control the amount of money that households choose to hold as currency. The Fed cannot control whether and to what extent banks hold excess reserves. Grade It Now Save & Continue Continue without saving

7. The reserve requirement, open market operations, and the money supply

Assume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is checkable deposits. To simplify the analysis, suppose the banking system has total reserves of $300. Determine the simple deposit multiplier and the money supply for each reserve requirement listed in the following table.

Reserve Requirement (Percent) Simple Deposit Multiplier Money Supply (Dollars)
20 1, 2, 5, 10, or 20 5 300, 600, 1,500, 3,000 or 6,000
10 1, 2, 5, 10, or 20 10 300, 600, 1,500, 3,000 or 6,000

A higher reserve requirement is associated with a smaller money supply.

Suppose the Federal Reserve wants to increase the money supply by $200. Again, you can assume that banks do not hold excess reserves and that households do not hold currency. If the reserve requirement is 10%, the Fed will use open-market operations to buy $20.00 worth of U.S. government bonds.

Now, suppose that, rather than immediately lending out all excess reserves, banks begin holding some excess reserves due to uncertain economic conditions. Specifically, banks increase the percentage of deposits held as reserves from 10% to 25%. This increase in the reserve ratio causes the multiplier to fall to . Under these conditions, the Fed would need to buy worth of U.S. government bonds in order to increase the money supply by $200.

Which of the following statements help to explain why, in the real world, the Fed cannot precisely control the money supply? Check all that apply.

The Fed cannot prevent banks from lending out required reserves.
The Fed cannot control the amount of money that households choose to hold as currency.
The Fed cannot control whether and to what extent banks hold excess reserves.

Grade It Now Save & Continue
Continue without saving

7. The reserve requirement, open market operations, and the money supply

Assume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is checkable deposits. To simplify the analysis, suppose the banking system has total reserves of 300. Determine the simple deposit multiplier and the money supply for each reserve requirement listed in the following table.

Reserve Requirement (Percent) Simple Deposit Multiplier Money Supply (Dollars)
20 1, 2, 5, 10, or 20 5 300, 600, 1,500, 3,000 or 6,000
10 1, 2, 5, 10, or 20 10 300, 600, 1,500, 3,000 or 6,000

A higher reserve requirement is associated with a smaller money supply.

Suppose the Federal Reserve wants to increase the money supply by200. Again, you can assume that banks do not hold excess reserves and that households do not hold currency. If the reserve requirement is 10%, the Fed will use open-market operations to buy $20.00 worth of U.S. government bonds.

Now, suppose that, rather than immediately lending out all excess reserves, banks begin holding some excess reserves due to uncertain economic conditions. Specifically, banks increase the percentage of deposits held as reserves from 10% to 25%. This increase in the reserve ratio causes the multiplier to fall to . Under these conditions, the Fed would need to buy worth of U.S. government bonds in order to increase the money supply by $200.

Which of the following statements help to explain why, in the real world, the Fed cannot precisely control the money supply? Check all that apply.

The Fed cannot prevent banks from lending out required reserves.
The Fed cannot control the amount of money that households choose to hold as currency.
The Fed cannot control whether and to what extent banks hold excess reserves.

Grade It Now Save Continue
Continue without saving

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