Question

1) Bank A has an increase in deposits of $10 million dollars and all bank reserve requirements are 20 percent. Explain how much would total money supply increase.

What is the relationship between reserve requirement ratio and the money supply?

2) What is the Federal Reserve System? Why does it exists? What are the two objectives of the Federal Reserve? Explain how the objectives are achieved.

Answer 1

Answer 1.) Required reserve = deposits × reserve ratio

= $10 million × 20% =$2 million

Excess reserve = $10 - $2 =$8 million

Money supply = excess reserve × money multiplier

= $8 million × 1/reserve ratio

=$8 million × 1/0.2

=$40 million

Money supply will increase by $40 million.

Higher the required reserve ratio lower the money supply. Lower the required reserve ratio higher the money supply in the economy.

Answer 2.) Federal reserve system often referred as fed is the central bank of the United States. It was created by the Congress to provide the nation with a safer, more flexible and more stable monetary and financial system.

Fed exist for the following purposes:

-influencing the supply of money and credit

-regulating and supervising financial institutions

-serving as a banking and fiscal agent for the United States government

The two objectives of fed are below:

- maximum employment

-stable prices for the goods and services

The federal Open Market Committee (FOMC) is committed to fulfiling these statutory mandate. In pursuing these objectives FOMC seeks to explain it's monetary policy decisions to the public as clearly as possible.