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 $500. Determine the money multiplier and the money supply for each reserve
requirement listed in the following table.
Reserve Requirement
(Percent)
25
Money Supply
(Dollars)
Simple Money Multiplier
10
A lower reserve requirement is associated with
money supply
worth of U. S.
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
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
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 control whether and to what extent banks hold excess reserves.
The Fed cannot control the amount of money that households choose to hold as currency.
The Fed cannot prevent banks from lending out required reserves.
Contou