The Fed wants to increase the money supply (which is currently $7,000) by $250. The money...

The Fed wants to increase the money supply (which is currently $7,000) by $250. The money multiplier is 3, and people hold no cash. For each 1 percentage point the discount rate falls, banks borrow an additional $10. Explain how the Fed can achieve its goals using the following tools:

a. Change the reserve requirement.

Instructions: Enter your response rounded to the nearest whole number.

The Fed should (lower or raise) the reserve requirement to ______ percent.

b. Change the discount rate.

Instructions: Enter your response rounded to two decimal places.

The Fed should (raise or lower) the rate by _____ percentage points.

c. Use open market operations.

Instructions: Enter your response rounded to two decimal places.

The Fed should (buy or sell) $________ worth of bonds.

Solutions

Expert Solution

a). Answer :- Lower the reserve requirement by Fed = 1.14942 % (Rounded off to 1 %).

Explanation :- Current reserve requirement = 1 / Money multiplier.

= 1 / 3

= 33.33333 % (approx).

Revised reserve requirement = 33.33333 * 7000 / 7250

= 0.3218391 i.e., 32.18391 % (approx)

Lowering of reserve requirement by 1.14942 % (33.33333 % - 32.18391 %) by Fed will increase the money supply. (1.14942 % rounded off to 1 %).

Conclusion :- Lowering of reserve requirement by 1 % (approx) by the Fed will increase the money supply.

b). Answer :- Lowering of discount rate by Fed = 8.33 % (approx).

Explanation :- Increase in reserves by Fed = 250 / 3

= $ 83.3333 (approx).

Lowering of discount rate by Fed = 83.3333 / 10

= 8.33 % (approx).

Conclusion :- Lowering of discount rate by 8.33 % by the Fed will increase reserves in the banking system in an economy which in turn will increase the overall money supply in an economy.

c). Answer :- Buy $ 83.33 worth of bonds.

Explanation :- Fed should buy bonds worth $ 83.33 (250 / 3) to increase money supply in economy. Buying of bonds worth $ 83.33 by the Fed will increase reserves in banking system in economy which in turn will increase the total money supply in economy.

Conclusion :- Buying bonds worth $ 83.33 by the Fed will increase money supply in an economy.

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

If the Fed wants to increase the money supply, it will _____ Treasury securities. Question 17...

If the Fed wants to increase the money supply, it will _____ Treasury securities. Question 17 options: a) issue b) buy c) sell d) hold When the Fed wants to change the money supply, it usually buys or sells money market mutual funds. Question 18 options: a) True b) False The Federal Reserve is the: Question 19 options: a) federal government's bank, central bank, and banker's bank in the United States. b) federal government's bank. c) U.S. central bank. d)...

Which of the following policies can the Fed follow to increase the money supply?

Which of the following policies can the Fed follow to increase the money supply? Reduce the interest rate on reserves Increase reserve requirements for banks Reduce the quantity of funds available through the Term Auction Facility Sell government bonds

Analyze the effects of an increase in the money supply , inflation and how the FED...

Analyze the effects of an increase in the money supply , inflation and how the FED selects the target federal funds rate and the important job or the trading desk. Describe direct and indirect effects and give examples for each

1) Suppose that the Fed decides to increase the growth rate of the money supply in...

1) Suppose that the Fed decides to increase the growth rate of the money supply in the United States. What is most likely to happen to the U.S. trade deficit and to GDP? Answer. The trade deficit will fall; GDP will rise Please explain why? 2) Explain three factors that would cause the dollar to appreciate?

To increase the money supply, the Fed could A. sell government bonds. B. decrease the...

To increase the money supply, the Fed could A. sell government bonds. B. decrease the discount rate. C. increase the reserve requirement. D. None of the above is correct. In recent years the Federal Open Market Committee has focused on a target for A. M1 growth. B. the federal funds rate. C. the number of Treasury Securities issued by the federal government. D. total reserves of banks.

Other things equal, an open market sale by the FED will: a) Increase the money supply...

Other things equal, an open market sale by the FED will: a) Increase the money supply b) Increase the interest rate c) Decrease the interest rate d) Decrease the discount rate Which one of the following is a monetary policy tool available to the FED? a) Open Market operations b) Reserve Requirements c) Discount Rate d) All of the above The tools that the FED has in its disposal to conduct monetary policy include: a) The fed funds rate and...

14) An increase in the money supply will cause an increase in which of the following...

14) An increase in the money supply will cause an increase in which of the following variables? A) output B) investment C) consumption D) all of the above E) none of the above 15) An increase in the money supply must cause which of the following? A) a leftward shift in the IS curve B) a reduction in the interest rate and ambiguous effects on investment C) an increase in investment and a rightward shift in the IS curve D)...

What tools can the FED use to increase or decrease the money supply. Describe it full....

What tools can the FED use to increase or decrease the money supply. Describe it full. What effect does each tool have on GDP inflation and employment. For example if the Fed increases interest rates what might be the impact of that action on GDP, Inflation and Employment?

Explain using a series of balance sheets how the Fed can increase the money supply in...

Explain using a series of balance sheets how the Fed can increase the money supply in the economy.

suppose the fed decreases the discount rate and buys bonds sufficient to increase the money supply...

suppose the fed decreases the discount rate and buys bonds sufficient to increase the money supply by $200 billion. what impact will this have on the interest rate, investment spending, real gdp, and the price level? would that be a good idea in today's economic environment? why or why not? draw graphs to illustrate your points, and describe them and the points thereon thoroughly.

Subjects