Question

Please explain in detail how would each following events affect the U.S. money supply? a. Banks decide to hold more excess reserves. b. People withdraw cash from their bank accounts for Christmas shopping. c. The Federal Reserve sells gold to the public.

Answer 1

Banks decide to hold more excess reserves.

Option - a

Explanation:

The US currency flow is the entire physical cash that circulates throughout the world and the funds in checks and savings.

a. Excess reserves are reserves beyond the legal deposit holding requirements of banks. The rise in the deposit rate of banks decreases financial multipliers which allow the supply of money to decrease.

b. Cash for Christmas shopping is deducted from people's bank accounts::

The expanded currency holding would boost the deposit rate, increasing the liquidity multiplier and decrease the money supply.

c. The Fed is selling gold to public

Gold selling to the public have the same impact as open market bond purchases — it decreases the economic base and thus the money supply fall.