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Assume that banks hold no excess reserves and that all currency is deposited into the banking system. If the required reserve ratio is 5.00%, and the Federal Reserve wants to increase the money supply by $35.00 million, the Fed would need to make an open market purchase of $ __________ million. (Insert your answer in millions, and round to two decimal places.)
Assume that banks hold no excess reserves and that all currency is deposited into the banking system. If the required reserve ratio is 5.00%, and the Federal Reserve wants to decrease the money supply by $75.00 million, the Fed would need to make an open market sale of $ _________ million. (Insert your answer in millions, and round to two decimal places.)
Suppose that banks decide to hold excess reserves. In order for the Federal Reserve to change the money supply by the same amounts as in parts 1 and 2, it would need to make
Choose one: ______
A. a smaller open market purchase but a larger open market sale.
B. a larger open market purchase and a larger open market sale.
C. a smaller open market purchase and a smaller open market sale.
D. a larger open market purchase but a smaller open market sale.

Respuesta :

The Fed would need to make an open market purchase of $1.75 million.

The Fed would need to make an open market sale of $3.75 million.

If the banks hold excess reserves, the Federal Reserve would make a larger open market purchase but a smaller open market sale.

The policies undertaken by the Central Bank of a country is known as monetary policy.

Types of monetary policy

  • Expansionary monetary policy: these are policy steps taken to increase the supply of money in an economy. An example is an open market purchase.

  • Contractionary monetary policy: these are policy steps taken to decrease the supply of money in an economy. An example is an open market sale.

Amount of open market purchase = targeted increase in money supply / money multiplier

Money multiplier = 1 / reserve requirement

1/ 0.05 = 20

$35 million / 20 = $1.75 million

Amount of open market sale = $75 million / 20 = $3.75 million  

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