Question

3. (10)In October, 2008, the Federal Reserve began paying interest on reserves. What did this do...

3. (10)In October, 2008, the Federal Reserve began paying interest on reserves. What did this do to the money multiplier? Why did this happen to the money multiplier? Be sure to use your money multiplier equation when answering this question.

Business   Economics   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

REQUIREMENTS:

The reserve bank requirement is minimum amount of cash flow in commerical banks which are supposed to hold in their vaults and not allowed to lend out. The excess reserves are held by banks in excess of their reserve requirement.The reserve requirement is set by Federal Reserve Systems.  

ANSWER:

Paying interest for the amount of excess reserves held by commercial banks will give them INCENTIVES to hold more excess reserve than lending out.

  1. It will increase the excess reserve ratio
  2. Decreases the Money Multiplier
  3. Decreases the Money Supply in the economy  
0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
) In the past, the Federal Reserve didn’t pay interest on reserves kept in Federal Reserve...
) In the past, the Federal Reserve didn’t pay interest on reserves kept in Federal Reserve banks. For an ordinary U.S. bank, money kept at the Fed earned zero interest, just like money stored in a vault or in an ATM. In 2008, the Fed started paying interest on deposits kept at the Fed. Briefly explain all your answers. Once the Fed started paying interest, what would you predict would happen to the demand for reserves by banks: Would they...
supposethatcurrencyincirculationis$600billion,theamountof chequable deposits is $900 billion, and excess reserves are $15 billion and the desired reserve...
supposethatcurrencyincirculationis$600billion,theamountof chequable deposits is $900 billion, and excess reserves are $15 billion and the desired reserve ratio is 10%. 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 $1400 billion due to a sharp contraction in the economy. Assuming the ratios you calculated in part (a) remain the same, predict the effect on the...
1.Why did the Federal Reserve (under chairman Paul Volker) have a policy of high interest rates...
1.Why did the Federal Reserve (under chairman Paul Volker) have a policy of high interest rates during a weak economy in the late 1970s/early 1980s? Explain their rationale. 2. On October 20, 1987, stock markets in the US and other countries witnessed steep drops in value. For example, the Dow Jones Industrial Average fell by over 20%. Many in finance and economics still refer to this day as Black Monday. (Question 2) How did the Federal Reserve (under chairman Alan...
Which of the following is incorrect? The reserves held to meet the reserve requirement are required...
Which of the following is incorrect? The reserves held to meet the reserve requirement are required reserves. The reserves held in excess of required reserves are excess reserves. Banks decide how much excess reserves to hold, so excess reserves can be positive or negative. Which of the following sets of variable(s) do you need to know in order to calculate the deposit multiplier, when banks are not necessarily loaned up? The required reserve ratio Maximum possible change in checkable deposits...
Bank A sells $10 million dollars of U.S. Treasury Securities to the Federal Reserve for $10...
Bank A sells $10 million dollars of U.S. Treasury Securities to the Federal Reserve for $10 million dollars. Before the sale Bank A had no excess reserves but did meet its required reserve requirement. What is the impact of this sale on the supply of M1 if the bank lends out the entire $10 million to various businesses in New York? Do you think the supply of money will increase by more than $10 million? Why?
Suppose that the reserve requirement for checking deposits is 10 percent and that banks do not...
Suppose that the reserve requirement for checking deposits is 10 percent and that banks do not hold any excess reserves. If the Fed sells $4 million of government bonds, what is the effect on the economy’s reserves and money supply? Now suppose the Fed lowers the reserve requirement to 5 percent, but banks choose to hold another 5 percent of deposits as excess reserves. Why might banks do so? What is the overall change in the money multiplier and the...
Suppose that the required reserve ratio is 9%, currency in circulation is $620 billion, the amount...
Suppose that the required reserve ratio is 9%, currency in circulation is $620 billion, the amount of checkable deposits is $950 billion, and excess reserves are $15 billion. 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 $1,300 billion due to a sharp contraction in the economy. Assuming the ratios you calculated in part...
What are the functions of money? Why do banks exist? What does the Federal Reserve do?...
What are the functions of money? Why do banks exist? What does the Federal Reserve do? What is the maximum extent that the money supply changes when the Federal Reserve instigates a monetary policy action? (short answer) Explain the features of the federal deposit insurance. (short answer)
Let’s say the Federal Reserve buys $20 Billion in bonds from private banks: *Total reserve requirement...
Let’s say the Federal Reserve buys $20 Billion in bonds from private banks: *Total reserve requirement = 0.10 x $1Trillion = $100 Billion What is the total amount (in $) of reserves that banks can lend? Using the simple deposit multiplier, how much additional money (M1) is created by this process? What will happen to the Federal Funds Rate, the prime rate, and other nominal interest rates in the economy? (Go up, down, stay the same?) Why? If the price...
3. Depending on the type of banking system a nation has, when its commercial bank reserves...
3. Depending on the type of banking system a nation has, when its commercial bank reserves increase by $1, that nation’s money supply could increase by more than $1. The rate at which money is created when commercial bank reserves rise is known as the money multiplier. A. Why is the money multiplier is generally greater than 1? In what special case would the money multiplier be equal to 1? B. Suppose the initial money supply is $1,000 and the...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT