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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

The money multiplier declined significantly during the period 1930-1933 and also during the recent financial crisis of 2008-2010. Yet the 2008-2010money supply decreased by 25% in the Depression period but increased by more than 20% during the recent financial crisis. What explains the difference in outcomes?

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?

Go to http://www.federalreserve.gov/releases/h6/hist/ and find the historical report of M1 and M2 by clicking on the “Data Download Program.” Compute the growth rate of each aggregate over each of the past three years. Does it appear that the Fed has been increasing or decreasing the rate of growth of the money supply? Is this consistent with your understanding of the needs of the economy? Why?

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.

If the Fed buys 1million of bonds from the First National Bank, but an additional 10% of any deposit is held as excess reserves, what is the total increase in checkable deposits? (Hint: Use T-accounts to show what happens at each step of the multiple expansion process.)
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