Question

In: Economics

Suppose the Federal Reserve sets the reserve requirement at 10 percent, banks hold no excess reserves,...

Suppose the Federal Reserve sets the reserve requirement at 10 percent, banks hold no excess reserves, and no additional currency is held.

Instructions: In part a, round your answer to 2 decimal place. In parts b and c, enter your answers as whole numbers. Include any negative signs if necessary.

a. What is the money multiplier?

b. By how much will the total money supply change if the Federal Reserve changes the amount of reserves by -$50 million?

$ million

c. Suppose the Federal Reserve wants to decrease the total money supply by $600 million. By how much should the Federal Reserve change reserves to achieve this goal?

$ million

Expert Solution

Solution:-

(a) Money multiplier = 1 / Reserve Ratio

= 1 / 0.10

= 10

(b) The change in the total money supply = Multiplier * Initial change in the reserves

Money supply change = 10 * (-50)

= -$500 million

(c) The required change in reserves = Required change in money supply / Multiplier

Increase reserves = 600 / 10

= $60 million

Rahul Sunny answered 6 months ago

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Suppose the Federal Reserve sets the reserve requirement at 10 percent, banks hold no excess reserves,...

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