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Chapter 15: Q9 (page 410)

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

Short Answer

Expert verified

The $100 million purchase of bonds will increase the monetary base.

Step by step solution

01

Concept Introduction

The $100 million acquisition of securities will build the financial base.

02

Explanation 

The $100 million acquisition of securities will build the financial base.

03

Explanation 

prompting an expansion in the cash supply. Bringing down the hold prerequisite makes the cash multiplier rise, prompting an expansion in the cash supply.

04

Final Answer

The $100 million acquisition of securities will build the financial base, prompting an expansion in the cash supply. Bringing down the hold prerequisite makes the cash multiplier rise, prompting an expansion in the cash supply.

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Most popular questions from this chapter

Suppose that the required reserve ratio is 9%, currency in circulation is 620billion, the amount of checkable deposits is 950billion, and excess reserves are 15billion.

a. Calculate the money supply, the currency deposit ratio, the excess reserve ratio, and the money multiplier.

b. Suppose the central bank conducts an unusually large open market purchase of bonds held by banks of 1300billion due to a sharp contraction in the economy. Assuming the ratios you calculated in part (a) remain the same, predict the effect on the money supply.

c. Suppose the central bank conducts the same open market purchase as in part (b), except that banks choose to hold all of these proceeds as excess reserves rather than loan them out, due to fear of a financial crisis. Assuming that currency and deposits remain the same, what happens to the amount of excess reserves, the excess reserve ratio, the money supply, and the money multiplier?

d. Following the financial crisis in 2008, the Federal Reserve began injecting the banking system with massive amounts of liquidity, and at the same time, very little lending occurred. As a result, the M1 money multiplier was below 1 for most of the time from October 2008 through 2011. How does this scenario relate to your answer to part (c)?

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?

“The Fed can perfectly control the amount of reserves in the system.” Is this statement true, false, or uncertain? Explain.

Suppose the Fed buys $1million of bonds from the First National Bank. If the First National Bank and all other banks use the resulting increase in reserves to purchase securities only and not to make loans, what will happen to checkable deposits?

Using T-accounts, show what happens to checkable deposits in the banking system when the Fed sells $2 million of bonds to the First National Bank.
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