Question

15. Suppose a bank has $3,000 in reserves, $25,000 of deposits, and a 10 percent reserve requirement. What is the amount of excess reserves? ________________________

16. The U.S unemployment rate for November 2018 fell to 3.7%, the lowest since 2000 after sitting at 4.1% for six consecutive months. What does this tells us about the U.S economy? What it doesn’t tell us about the U.S economy? Is this a perfect indicator of the U.S labor market? Why/why not? ___________________________________________________________________ _______________________________________________________________________________________________________________________________________________________.

17. Explain how each of the following changes the money supply and the AD. a. the Fed buys bonds: Money supply ______________________ and AD shifts __________________. b. the Fed raises the discount rate: Money supply ______________________ and AD shifts __________________. c. the Fed raises the reserve requirement: Money supply ______________________ and AD shifts __________________.

18. The Fed _________________ bonds when it conducts an open-market purchase. This action ___________________ the money supply.

19. If the Federal Reserve’s goal is to stabilize aggregate demand, then in response to an increase in money demand, the Federal Reserve will _______________________ the money supply.

Answer 1

Question 15

Deposits = $25,000

Reserve requirement = 10%

Reserves = $3,000

Required reserves = Deposits * Reserve requirement = $25,000 * 0.10 = $2,500

Calculate the excess reserves -

Excess reserves = Reserves - Required reserves = $3,000 - $2,500 = $500

Thus,

The amount of excess reserves is $500.

Question 18

Open market purchase implies buying of bonds by the Fed. This leads to the increase in excess reserves with banks inducing them to make more loans thereby increasing the money supply.

So,

The Fed buys bonds when it conducts an open market purchase. This action increases the money supply.