Please state whether each of the following statements is TRUE or FALSE, and then explain your...

Please state whether each of the following statements is TRUE or FALSE, and then explain your choice briefly.

Please start your answer by writing either TRUE or FALSE. Answers without that clear statement at the beginning, and with excessively long (more than 2-3 short sentences) explanations will be penalized.
1. Banks can still influence the money supply if they are required to hold all deposits in reserve.
2. In the months of November and December, people in the U.S. hold a larger part of their money in the form of currency because they intend to shop and travel for the holidays. As a result, other things the same, the money supply increases.
3. Bank runs are only a concern under a fractional reserve banking system.
4. The money multiplier is lower when bankers are more cautious and hold excess reserves.

Solutions

Expert Solution

Banks can still influence the money supply if they are required to hold all deposits in reserve.
FALSE - Money supply is affected by teh money multiplier which is a function of reserve requirement. If reserves are 100%, money multiplier is 1, so banks won't be able to influence money supply if they are required to hold all the deposits in reserve
In the months of November and December, people in the U.S. hold a larger part of their money in the form of currency because they intend to shop and travel for the holidays. As a result, other things the same, the money supply increases.
FALSE - Money supply includes cash but it is a small component. A large part of money supply is a result of multiples of deposits in the form of lending by banks (which is a function of money multiplier). If, say, money multiplier is 5 (reserve requirement 20%), withdrawal of $100 by people from the banking system will result in money supply going down by $500.
Bank runs are only a concern under a fractional reserve banking system.
FALSE - Even if reserve requirement was at 100%, banks may not be holding these in the form of cash. In the case of a bank run, unavailability of cash in bank branches would still be a problem.
The money multiplier is lower when bankers are more cautious and hold excess reserves.
TRUE - Money multiplier goes down as reserves go up.

Rahul Sunny answered 2 months ago

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