Question 2If reserves increase, banks have the ability to make more loans, which as we haveseen would increase the money supply. Suppose the Fed uses open marketoperations to add $1 million in reserves to the banking system, and all banks keep aratio of reserves to deposits of 20%. Then according to the money multiplier formula,by how much will the money supply ultimately increase? (Answer in millions, to thenearest .1 million if your answer is not an integer.)Your Answer:AnswerD View hint for Question 2Question 3 (.Chapter 11 mentions that in the past the Fed did not pay interest on accounts thatbanks kept with it, but that since 2008 it has paid interest on these accounts. Doesthe Fed paying interest have any effect on the ratio of reserves to deposits thatbanks choose to hold? Does it increase the reserve ratio, decrease it, or have noeffect on it? Explain briefly. (Graded for participation only.)

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Question 2 If reserves increase, banks have the ability to make more loans, which as we have seen would increase the money supply. Suppose the Fed uses open market operations to add $1 million in reserves to the banking system, and all banks keep a ratio of reserves to deposits of 20%. Then according to the money multiplier formula, by how much will the money supply ultimately increase? (Answer in millions, to the nearest .1 million if your answer is not an integer.) Your Answer:

Question 2 If reserves increase, banks have the ability to make more loans, which as we have seen would increase the money supply. Suppose the Fed uses open market operations to add $1 million in reserves to the banking system, and all banks keep a ratio of reserves to deposits of 20%. Then according to the money multiplier formula, by how much will the money supply ultimately increase? (Answer in millions, to the nearest .1 million if your answer is not an integer.) Your Answer:

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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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 $300. 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 __larger, smaller__money supply.Suppose the Federal Reserve wants to increase the money supply by $200. Again, you can assume that banks do not hold excess reserves and that households do not hold currency. If the reserve requirement is 10%, the Fed will use open-market operations to ____buy / sell_$___________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…