18. Open Market Operations and the Money Multiplier Suppose that the reserve requirement for checking deposits is 10 percent and
that banks do not hold any excess reserves. If the Fed sells $1 million of government bonds, the economy’s reserves increase by $100 million, and the money supply will increase by $9 million. Now suppose the Fed lowers the reserve requirement to 5 percent, but banks choose to hold another 5 percent of deposits as excess reserves. This will the money multiplier, and it will the money supply.
1 answer:
You might be interested in
Answer: C. The decline in the P/E ratio more than offset earnings growth and this pushed the market cap down.
Explanation:
Market Cap = P/E ratio * Earnings
Market cap is dependent on both the P/E ratio and Earnings as shown by the formula and as shown on the graph, the P/E ratio kept on decreasing which means that for the Market Cap to decrease, the downward pull of the P/E ratio must have overshadowed the growth in earnings such that the Market Cap went down instead of up.
For instance, if the earnings were $40 billion and the P/E ratio was 15, Market Cap would be $600 billion.
If earnings increased to $45 billion but P/E ratio decreased to 10, Market Cap would become $450 billion.
