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Chapter 15: Q.24 (page 411)

If the Fed sells 1 million of bonds and banks reduce their borrowings from the Fed by million, predict what will happen to the money supply.

Short Answer

Expert verified

Selling of bonds by fed and banks lowering their borrowings with fed, both take the money out of the economy so M1will reduce by 2million.

Step by step solution

01

Concept Introduction

The cash supply is the whole measure of cash, coins, and balances in financial balances available for use. The cash supply is for the most part characterized to be a bunch of safe resources that families and organizations can use to make installments or to hold as transient speculations.

02

Explanation

The Fed can handle the cash supply by altering save prerequisites, which regularly alludes to how much finances banks should hold against stores in ledgers. By bringing down the hold prerequisites, banks can credit more cash, which extends the general stockpile of cash in the economy.

03

Final Answer

Selling of bonds by fed and banks lowering their borrowings with fed, both take the money out of the economy soM1 will reduce by 2million

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Most popular questions from this chapter

Describe how each of the following can affect the money supply:

(a) The central bank

(b) banks

(c) depositors.

If you decide to hold \(100 less cash than usual and therefore deposit \)100 more cash in the bank, what effect will this have on checkable deposits in the banking system if the rest of the public keeps its holdings of currency constant?

Go to the St. Louis Federal Reserve FRED database, and find data on the M1 Money Stock (M1SL) and the Monetary Base (AMBSL).

a. Calculate the value of the money multiplier using the most recent data available and the data from five years prior.

b. Based on your answer to part (a), how much would a 100million open market purchase of securities affect the M1 money supply today and five years ago?

Suppose the central bank of your country increases reserves by purchasing $1 million worth of bonds from banks and that the banking system in your economy is in equilibrium. What will happen to the level of checkable deposits? Use T-accounts to explain your answer.

The Fed buys $100 million of bonds from the public and also lowers the required reserve ratio. What will happen to the money supply?
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