Question

The Fed wants to increase the money supply (which is currently $4,000) by $200. The money multiplier is 3, and people hold no cash. For each 1 percentage point the discount rate falls, banks borrow an additional $20. Explain how the Fed can achieve its goals using the following tools:

Answer 1

Fed can achieve its goals using the given tools as shown below.

What is money supply?

• The money supply (or money stock) in macroeconomics refers to the entire volume of currency held by the public at a given point in time.
• There are numerous definitions of "money," but common measures often include currency in circulation and demand deposits (depositors' easily accessible assets on financial institutions' accounts).
• A country's central bank may utilize a definition of what constitutes legal money for its own reasons.
• Money supply data is recorded and released, typically by a government agency or the country's central bank.
• Changes in the money supply are monitored by public and private sector experts because it is believed that such changes affect the prices of securities, inflation, exchange rates, and the business cycle.

In the given situation, Fed can achieve its goals using the given tools:

1. Change the reserve requirement - The Fed should lower the reserve requirement to 48 ± 1 percent.
2. Change the discount rate - The Fed should lower the rate by 12.50 ± 0.01 percentage points.
3. Use open market operations - The Fed should buy $125.00 ± 0.01 worth of bonds.

Therefore, Fed can achieve its goals using the given tools as shown.

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The complete question is given below:
The Fed wants to increase the money supply (which is currently $5,000) by $250. The money multiplier is 2, and people hold no cash. For each 1 percentage point, the discount rate falls, and banks borrow an additional $10. Explain how the Fed can achieve its goals using the following tools:

a. change the reserve req.

b. change the discount rate.

c. use open market operations.