Assume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is demand deposits. To simplify the analysis, suppose the banking system has total reserves of $100. Determine the money multiplier and the money supply for each reserve requirement listed in the following table.
Reserve Requirement Simple Money Multiplier Money Supply
(Percent) (Dollars)
25
10
A lower reserve requirement is associated with a money supply.
Suppose the Federal Reserve wants to increase the money supply by $100. Again, you can assume that banks do not hold excess reserves and that households do not hold currency. If the reserve requirement is 10%, the Fed will use open-market operations to worth of U.S. government bonds.
Now, suppose that, rather than immediately lending out all excess reserves, banks begin holding some excess reserves due to uncertain economic conditions. Specifically, banks increase the percentage of deposits held as reserves from 10% to 20%. This increase in the reserve ratio causes the money multiplier to to . Under these conditions, the Fed would need to worth of U.S. government bonds in order to increase the money supply by $100.
Which of the following statements help to explain why, in the real world, the Fed cannot precisely control the money supply? Check all that apply.
The Fed cannot control the amount of money that households choose to hold as currency.
The Fed cannot prevent banks from lending out required reserves.
The Fed cannot control whether and to what extent banks hold excess reserves.

B. A lower reserve requirement is associated with a (larger) money supply. This is done when the government wants more money to be in circulation. It is an expansionary policy.

C. Suppose the Federal Reserve wants to increase the money supply by $100. Again, you can assume that banks do not hold excess reserves and that households do not hold currency. If the reserve requirement is 10%, the Fed will use open-market operations to (purchase 100 × 10% = $10) worth of United States government bonds.

D. Now, suppose that, rather than immediately lending out all excess reserves, banks begin holding some excess reserves due to uncertain economic conditions. Specifically, banks increase the percentage of deposits held as reserves from 10% to 20%. This increase in the reserve ratio causes the money multiplier to (fall to 100 ÷ 20=5). Under these conditions, the Fed would need to (purchase 100 × 20% = $20) worth of U.S. government bonds in order to increase the money supply by $100.

E. The statements that help to explain in the real world why the Fed cannot control the money supply are:

• The Fed cannot control the amount of money that households choose to hold as currency.

• The Fed cannot control whether and to what extent banks hold excess reserves

suchetasVT suchetasVT · Answer 2 · 2022-04-05T17:37:59+02:00

The Money Multiplier denotes how an initial deposit can result in a larger final increase in the total money supply.

What do you mean by money multiplier?

The money multiplier is a term in the financial economy that is the act of generating money in the economy through credit creation, based on a fractional banking system.

Money multiplication is also known as cash multiplication.

[tex]\rm\,Total\; Reserve = \$100\\\\Money\; supply = Total \;reserve \; \times \rm\, multiplier\\\\When \;the\; reserve \;requirement \;is \;25\%\\\\Simple\; money \;multiplier\; = \dfrac{1}{25\%} = 4\\\\Money \;supply = 100 \times 4 = \$400\\\\When\; the \;reserve\; requirement\; is \;10\%,\\\\Simple\; money \;multiplier = \dfrac{1}{ 10\%} = 10\\\\Money \;supply = 100 \times 10 = \$1000[/tex]

In the real world why the Fed cannot control the money supply are:

• The Fed cannot control the amount of money that households choose to hold as currency.

• The Fed cannot control whether and to what extent banks hold excess reserves.

Hence, the Fed cannot control the amount of money that households choose to hold as currency and the Fed cannot control whether and to what extent banks hold excess reserves are the correct statements.

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