Macroeconomics Theories and Policies
Quiz 17 :
Money,the Banking System,and Interest Rates
The money supply is $1.2 billion,or $1,200 million. (b).If the Fed sells $4 million of T-Bonds,what is the change in the economy's money supply? The money supply falls by $16 million. (c).If the Fed would reduce the reserve requirement to 20%,what would be the change in the money supply? The money supply would increase to $1.5 billion. (d).If the Fed reduced the reserve requirement ratio to 20% but banks preferred to hold the extra 5% as excess reserves,what would be the change in the money supply? There would be no change in the money supply.
The monetary base totals $2,800. (b).what is the money supply? The money supply amounts to $20,800. (c).if the required reserve ratio is 10% and banks hold no more excess reserves,then what will the money supply be if the Fed increases total bank reserves by $100? The money supply will be $21,800.
It can control the reserve position of banks by means of open-market operations,the discount rate,and the reserve requirement ratio.Open-market sales,reductions in the discount rate,and reductions in the reserve requirement ratio all increase the level of bank reserves in the system.The Fed uses open market operations because it is easy to do,quick to implement,and allows for small changes in the monetary base.