Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134078779
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Question
Chapter 25, Problem 2.4P
To determine
Why leakages make it difficult for the fed to control the money supply precisely.
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Check out a sample textbook solutionStudents have asked these similar questions
Currently, the Fed does not have complete control of the money supply because
the Congress and the Treasury can also make changes to the money supply.
government bonds may not be available for purchase when the Fed wants to perform OMO.
the Fed does not know where all the U.S. currency is located.
the amount of money in the real economy depends on the behavior of depositors and bankers.
All of the above are correct.
The U.S. money supply (M1) at the beginning of 2015 was $2,683.3 billion broken down as follows: $1,165.7 billion in currency, $3.5 billion in traveler's checks, and
$1,514.1 billion in checking deposits.
Suppose the Fed decided to increase the money supply by decreasing the reserve requirement from 11 percent to 10 percent. Assume all banks were initially
loaned up (had no excess reserves) and the quantity of currency and traveler's checks held outside of banks did not change.
How large a change in the money supply would have resulted from the change in the reserve requirement?
The money supply would change by $ billion. (Round your response to two decimal places and include a minus sign if necessary.)
A deposit of $100 was made to the bank as
we know the money supply won't increase
until the bank loans the $100. If the required
reserve ratio is 6%, how much will the money
supply ultimately increase once this new
deposit has gone all the way through the
system? What is the money multiplier in this
case?
Chapter 25 Solutions
Principles of Economics (12th Edition)
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- 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 whether and to what extent banks hold excess reserves. The Fed cannot control the amount of money that households choose to hold as currency.arrow_forwardSuppose again that checkable deposits started off at $400,000 in First Main Street Bank, the required reserve ratio is 15%, and no excess reserves and no cash leakage exist. You know from the previous step that, due to the sale of securities by the Fed, the money supply in the economy contracted from $400,000 to $392,000. But the contraction of the money supply does not stop with First Main Street Bank. It moves to other banks. The loan repayment that Charles made to First Main Street Bank was written on a check Second Republic Bank issued. Then, when the check cleared, the reserves of Second Republic Bank declined, and Second Republic Bank found itself reserve deficient as well. It applied loan repayments to its reserve deficiency position. The effect continued with other banks and so on. The initial removal of funds in the amount of $8,000 will cause the money supply to contract by $______. Therefore, the money supply is $______. (Hint: round the results of your calculations to the…arrow_forwardSuppose you examine the central bank’s balance sheet and observe that since the previous day, reserves had risen by $400 million. In addition, on the asset side of the central bank’s balance sheet, securities had risen by $400 million. What activity did the central bank carry out earlier in the day to lead to these changes in the balance sheet? Do you think by carrying out this activity the central bank was aiming to increase, decrease, or maintain the size of the money supply? The central bank conducted an open market (purchase /sale) of $400 million with a commercial bank. This transaction would involve $400 million of securities being ( added to / removed from) the central bank’s balance sheet. There would be (an increase / a fall ) of $400 million in reserves to reflect the related payment ( to / by ) the commercial bank ( from / into) its reserve account. By carrying out this activity, the central bank was aiming to (increase / decrease) maintain the size of the money supply.arrow_forward
- Money serves three functions in the economy: medium of exchange, unit of account, and store of value. Which of the following statements describes how inflation affects the ability of money to serve as a unit of account? Check all that apply. In some countries with hyperinflation, prices are posted in terms of U.S. dollars rather than the local currency, even though the local currency is still used to purchase the good. Inflation erodes money's purchasing power. Inflation causes menu costs.arrow_forwardM1 is the narrowest definition of the money supply. It includes currency in circulation, checking account deposits and travelers checks. The statements refer to factors that can affect the money multiplier. Label each statement as true or false. The total change in the M1 brought about by the money multiplier is affected by the amount of deposits made by households and businesses.Banks must lend out all their excess reserves in order to change the M1 money supply.The Federal Reserve (Fed) has very little effect on the money multiplier.The state of the economy can affect the amount of excess reserves that banks keep on reserve, thereby affecting the impact of the money multiplier.arrow_forwardDuring the financial crisis, banks excess reserves [beyond what is required by regulatory reserve requirements] exploded. If the Federal Reserve Bank of New York purchased $1 billion in U.S. Treasury Bills in this environment and the reserve requirement is 20%, then the change in the total money supply will be approximately: Group of answer choices an increase of a bit more than $1 billion. a decrease of a bit more than $1 billion. an increase of a bit less than $5 billion. a decrease of a bit less than $5 billionarrow_forward
- One of the instruments available for controlling money supply is Open Market Operation(OMO). Explain briefly this instrument and how it works to control money in circulation!arrow_forwardAssume that bank deposits are $3,200 billion, the required reserve ratio is 10%, and currency outstanding is $400 billion. Calculate the money multiplier. What can the Fed do to decrease the money supply by $100 million? Assume that banks do not hold excess reservesarrow_forward
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