Answer: <u>Please refer to Explanation</u>
Explanation:
The Money Multiplier is used to calculate how much money that a certain amount of bank reserves can supply given a certain Reserve Requirement.
The Money Multiplier is calculated by Dividing 1 by the reserve requirement.
1. a. Reserve Requirement of 25%
Money Multiplier = 1 / 25%
= 4
Money Supply = $500 * 4
= $2,000
b. Reserve Requirement of 10%
Money Multiplier = 1 / 10%
= 10
Money Supply = $500 * 10
= $5,000
c. A lower reserve requirement is associated with a higher money supply.
It is evident from the above that when the reserve requirement is lower, the money supply is higher.
2. The Fed buying Bonds means more money comes into the system. This means a change in money supply by the formula,
Change in Money Supply = Bonds purchased * Money Multiplier
Money Multiplier assuming 10% reserve requirement is 1/10% = 10
200 = Bonds Purchased * 10
Bonds Purchased = 200/10
= $20
The Fed will use Open Market Operations to buy <u>Bonds of $20</u>.
3. The Reserve Requirement increases to 25% so the new Multiplier will be,
= 1/25%
= 4
This increase in the reserve ratio causes the money multiplier to fall to 4.
4. Under these conditions, the Fed would need to_______worth of U.S. government bonds in order to increase the money supply by $200.
Change in Money Supply = Bonds purchased * Money Multiplier
200 = Bonds Purchased * 4
Bonds Purchased = 200/4
= $50
5. A. The Fed cannot control whether and to what extent banks hold excess reserves.
The Fed indeed cannot stop banks from holding excess reserves over the amount that they mandate as required reserves. Banks might decide that the Economy is not doing well enough to release funds.
C. The Fed cannot control the amount of money that households choose to hold as currency.
The Fed as well cannot control how much households hold as currency. Households could choose to save more or less of their monies and it is entirely their own prerogative.
