Question

Consider 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 $400. Determine the money multiplier and the money supply for each reserve requirement listed in the following table.

Answer 1

The determination of the money multiplier and the money supply for each reserve requirement listed in the following table are as follows:

Reserve Requirement    Simple Money     Money Supply

(percent)                             Multiplier             (Dollars)

  5                                          20                      $8,000

10                                           10                      $4,000

What is the money multiplier?

The money multiplier is the ratio of the reserve to the money supply.

The formula for determining the money multiplier is 1/r where r is the reserve ratio.

What is the money supply?

The money supply is the total amount of money circulating in the commercial banking system.

The quantity of the money supply is determined by multiplying the money multiplier by the total reserves.

Data and Calculations:

Reserve Requirement    Simple Money     Money Supply

(percent)                             Multiplier             (Dollars)

  5                                    20 (1/0.05)               $8,000 ($400 x 20)

10                                     10 (1/0.1)                  $4,000 ($400 x 10)

Question Completion:

Reserve Requirement    Simple Money     Money Supply

(percent)                             Multiplier             (Dollars)

  5

10

Thus, the money multiplier and money supply for the 5% reserve requirement are higher than for the 10% reserve requirement.

Learn more about money multiplier, reserves, and money supply at brainly.com/question/4412587

#SPJ1