Question

 8. The reserve requirement, open market operations, and the moneysupply

 Assume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is demand deposits. To simplify the analysis, suppose the banking system has total reserves of $400. Determine the money multiplier and the money supply for each reserve requirement listed in the following table.

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

 Suppose the Federal Reserve wants to increase the money supply by s200. Again, you can assume that banks do not hoid excess reserves and that households do not hold currency. If the reserve requirement is 10%, the Fed will use open-market operations to _______  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 money multiplier to _______  to _______. Under these conditions, the Fed would need to _______  worth of U.S. government

 bonds in order to increase the money supply by $200.

Answer 1