What would happen to the monetary base if the following occurred? Explain your reasoning. No points...
What would happen to the monetary base if the following occurred? Explain your reasoning. No points awarded without an adequate explanation.
a. I withdraw $200 in currency from my checking account (3 points)
b. the U.S. Treasury distributes to households $20 billion in social security payments, paying with deposits in its Fed account (3 points)
c. The Federal Reserve decreases the required reserve ratio (4 points)
Homework Answers
a. There will be no change in monetary base. As Monetary base is equal to currency plus reserves. When $200 is taken from currency and deposited as reserves rises by the same amount. so it doesn't change monetary base.
b. There will be rise in Monetary base by $29 billion as Fed Deposits are not part of Monetary base. When Fed distributes the money, it increases the Monetary base.
c. When required reserve ratio falls, multiplier rises. So monetary base rises.
As money multiplier= 1/Reserve ratio.
As monetary base=Multiplier* Money supply.
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