Question

Suppose the reserve requirement is initially set at 5%.

Instructions: In parts a and c, round your answers to two decimal places. In parts b and d, round your answers to one decimal place.

a. At a reserve requirement of 5%, what is the value of the money multiplier?

      20 20 Correct

b. If the reserve requirement is 5% and the Fed increases reserves by $40 billion, what is the total increase in the money supply?

     $ 800 800 Correct billion

c. Suppose the Fed raises the reserve requirement to 15%. What is the value of the money multiplier now?

      6.66 6.66 Correct

d. Assume the reserve requirement is 15%. If the Fed increases reserves by $40 billion, what is the total increase in the money supply?

     $ 266.67 266.67 Incorrect billion (need help with this one everything else is correct.

e. Raising the reserve requirement from 5% to 15% decreases  Correct the money multiplier and decreases  Correct the money supply.

Answer 1

1) Solution: 20

Explanation: Multiplier = 1/rr = 1/0.05 = 20

2) Solution: 800 billion

Explanation: Multiplier = 1/rr = 1/0.5 = 20. Thus when Fed increases reserves by $40 billion the money supply increases by 40 billion * 20 = 800 billion

3) Solution: 6.667

Explanation: Multiplier = 1/rr = 1/0.15 = 6.667

4) Solution: 533.33 billion

Explanation: Multiplier = 1/rr = 1/0.15 = 6.667. Thus when Fed increases reserves by $40 billion the money supply increases by 40 billion * 6.667 = 266.67 billion

Money Multiplier = total increase in money supply / initial excess reserves

Thus 800 - 266.6 = 533.33 billion