Question

1. According to the linked article, the Fed has stated that it is committed to keeping interest rates low and is actively buying US Treasury Bonds. ("increasing asset purchases" refers to the Fed's actions to buy US Treasury bonds). Given the current state of the economy do you agree or disagree with this policy? For full credit your answer must state: (a) whether you agree or disagree (choose one - you can't argue this both ways!); (b) a one or two sentence explanation of why you agree or disagree with the policy given the current state of the economy (don't forget to mention what the current state of the economy is!)

2.

Suppose a banking system has $ 135,000 of checkable deposits and actual reserves of $ 18,000. If the reserve ratio is 8% the banking system can expand the supply of money by a maximum of $ ____.

(Put only numbers in your answer; do not put a dollar sign in your answer.)

Answer 1

1 - Yes , I agree with the given statement of fed purchasing the bonds.

The economy is currently in the state of recession with lesser amount of money supply in the economy. In order make everything on track , and to increase the liquidity and money supply in the economy , the fed will have to buy the bonds in the open market and try to keep interest rates low in order to enable cheap borrowing. Hence the statement is correct.

2 - Reserve ratio = 8 %

Desired reserves = 135000*8%

= $ 10800

Actual reserves = 18000

Excess reserves = 18000-10800

= $ 7200

Money multiplier = 1/0.08

= 12.5

Total increase in money supply = 7200*12.5

= $ 90000