MACROECONOMICS
14th Edition
ISBN: 9781337794985
Author: Baumol
Publisher: CENGAGE L
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Question
Chapter 15, Problem 4TY
a)
To determine
To Describe: The money supply
b)
To determine
To Describe: The amount of M.
c)
To determine
To Explain: The relationship between
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The Federal Reserve and the money supply
Suppose the money supply (as measured by checkable deposits) is currently $300 billion. The required reserve ratio is 25%. Banks hold $75 billion in reserves, so there are no excess reserves.
The Federal Reserve (“the Fed”) wants to decrease the money supply by $32 billion, to $268 billion. It could do this through open-market operations or by changing the required reserve ratio. Assume for this question that you can use the simple money multiplier.
If the Fed wants to decrease the money supply using open-market operations, it should ______(buy/sell) $_________
billion worth of U.S. government bonds.
If the Fed wants to decrease the money supply by adjusting the required reserve ratio, it should ______(increase/decrease) the required reserve ratio.
THis is one question . please answer with an explanation.
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:
Answer
D View hint for Question 2
Question 3 (.
Chapter 11 mentions that in the past the Fed did not pay interest on accounts that
banks kept with it, but that since 2008 it has paid interest on these accounts. Does
the Fed paying interest have any effect on the ratio of reserves to deposits that
banks choose to hold? Does it increase the reserve ratio, decrease it, or have no
effect on it? Explain briefly. (Graded for participation only.)
Suppose the money supply (as measured by checkable deposits) is currently $300 billion. The required reserve ratio is 20%. Banks hold $60 billion in reserves, so there are no excess reserves.
The Federal Reserve (“the Fed”) wants to decrease the money supply by $17.5 billion, to $282.5 billion. It could do this through open-market operations or by changing the required reserve ratio. Assume for this question that you can use the simple money multiplier.
If the Fed wants to decrease the money supply using open-market operations, it should ___ (buy or sell) $_____ (fill in blank) billion worth of U.S. government bonds.
If the Fed wants to decrease the money supply by adjusting the required reserve ratio, it should ________ (increase or decrease) the required reserve ratio.
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- Suppose Never Bank (not the central bank), operating in (fictitious country) Neverland holds $100 million in deposits. Also assume that banks in Neverland are supposed to maintain the (required) reserve ratio of 10%. a) Assume initially that Never Bank is the only bank in Neverland. State the effects on money supply if Never Bank decides not to make any loans. Compare this to the effect on money supply if, alternatively, Never Bank decides to loan out all its available deposits for loans. b) What will be the effect on money supply if many banks start to open and operate in Neverland and they loan out all their available deposits. c) Go back to the scenario presented in Part a, where Never Bank is the only bank in Neverland. Suppose, people of Neverland decide to withdraw their deposits with the Never Bank and keep their money with them as currency. What is the quantity of money in Neverland in this situation? State the assumption you made here. Compare the quantity of money in this…arrow_forwardNow, suppose that, rather than immediately lending out all excess reserves, banks begin holding some excess reserves due to uncertain economic conditions. Specifically, banks increase the percentage of deposits held as reserves from 10% to 25%. This increase in the reserve ratio causes the money multiplier to to . Under these conditions, the Fed would need to 2$ 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 prevent banks from lending out required reserves. The Fed cannot control the amount of money that households choose to hold as currency. The Fed cannot control whether and to what extent banks hold excess reserves.arrow_forwardConsider a banking system where the Federal Reserve uses required reserves to control the money supply. (This was the case in the U.S. prior to 2008.) 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. Reserve Requirement Money Supply (Percent) Simple Money Multiplier (Dollars) 5 10 A higher reserve requirement is associated with a money supply. Suppose the Federal Reserve wants to increase the money supply by $200. Again, you can assume that banks do not hold excess reserves and that households do not hold currency. If the reserve requirement is 10%, the Fed will use open-market operations to 2$ worth of U.S. government bonds. Now, suppose that, rather than immediately lending out all excess reserves, banks begin…arrow_forward
- Suppose the Federal Reserve conducts an open market purchase from a bank for $300 million. Assuming the required reserve ratio is 10%, what would be the effect on the money supply in each of the following situations? If there are many banks, all of which make loans for the full amount of their excess reserves, the money supply will increase by $ million. (Enter your response as a whole number.)arrow_forwardSuppose Never Bank (not the central bank), operating in (fictitious country) Neverland holds $100 million in deposits. a) Also assume that banks in Neverland are supposed to maintain the (required) reserve ratio of 10%. Assume initially that Never Bank is the only bank in Neverland. State the effects on money supply if Never Bank decides not to make any loans. Compare this to the effect on money supply if, alternatively, Never Bank decides to loan out all its available deposits for loans. b) Go back to the scenario presented in Part a, where Never Bank is the only bank in Neverland. Suppose, people of Neverland decide to withdraw their deposits with the Never Bank and keep their money with them as currency. What is the quantity of money in Neverland in this situation? State the assumption you made here. Compare the quantity of money in this situation with the one in ‘Part a’ where the Never Bank does not make any loans out of its deposits.arrow_forwardSuppose for each dollar of demand deposits the public holds $0.30 in currency. Suppose further that banks are required to hold required reserves equal to 0.12 of their demand deposits. If the monetary base is $5,000, determine the money supply (M). If the reserve requirement ratio on demand deposits increases to 0.15, how will your answer to section (a) be affected? If the public stops carrying currency, how will your answer to section (a) be affected? If the central bank sells $200 of government securities, how will your answer to section (a) be affected?arrow_forward
- Suppose Never Bank (not the central bank), operating in (fictitious country) Neverland holds $100 million in deposits. Also assume that banks in Neverland are supposed to maintain the (required) reserve ratio of 10%. a. Assume initially that Never Bank is the only bank in Neverland. State the effects on money supply if Never Bank decides not to make any loans. Compare this to the effect on money supply if, alternatively, Never Bank decides to loan out all its available deposits for loans. (compare both the scenarios in 150 words or less). b. What will be the effect on money supply if many banks start to open and operate in Neverland and they loan out all their available deposits. (explain in 100 words or less) c. Go back to the scenario presented in Part a, where Never Bank is the…arrow_forwardAssume 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 $400. Determine the money multiplier and the money supply for each reserve requirement listed in the following table. Reserve Requirement Simple Money Multiplier Money Supply (Percent) (Dollars) 20 10 A higher reserve requirement is associated with a 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 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.…arrow_forwardAssume 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 $100. Determine the money multiplier and the money supply for each reserve requirement listed in the following table. Reserve Requirement Simple Money Multiplier Money Supply (Percent) (Dollars) 25 10 A lower reserve requirement is associated with a money supply. Suppose the Federal Reserve wants to increase the money supply by $100. 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 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.…arrow_forward
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