Question

The Federal Reserve wants to increase the money supply by printing and distributing 1 million dollars...

The Federal Reserve wants to increase the money supply by printing and distributing 1 million dollars worth of currency notes. What will be the actual increase in money supply if the public holds one-fourth of the currency as cash, and deposits rest of the money in banks that hold 5 percent of their deposits as reserves?

Business   Economics   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Currency hold by public= (1/4) x 1 million= 250,000

Remaining amount deposited into bank:

Deposit= 1 million - 250,000= 750,000

Through the process of money creation banking system can increase money supply manyfold through this initial deposit.

Money creation by bank= initial deposit x 1/Reserve requirement= 750,000 x 1/5%= 750,000 x 20= 15,000,000

Reserve out of total money creation= 15,000,000 x 0.05= 750,000

Total Loan amount = 14,250,000

Increase in money supply= 250,000+14,250,000= 15,000,000

The initial printing of money of 1 million cause money supply to increase by 15,000,000.

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
Although the U.S. Federal Reserve doesn't use changes in reserve requirements to manage the money supply,...
Although the U.S. Federal Reserve doesn't use changes in reserve requirements to manage the money supply, the central bank of Albernia does. The commercial banks of Albernia have $100 million in reserves and $1,000 million in checkable deposits; the initial required reserve ratio is 10%. The commercial banks follow a policy of holding no excess reserves. The public holds no currency, only checkable deposits in the banking system. How will the money supply change if the minimum reserve ratio rises...
8. The reserve requirement, open market operations, and the money supply Assume that banks do not...
8. The reserve requirement, open market operations, and the money supply Assume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is demand deposits. To simplify the analysis, suppose the banking system has total reserves of $500. Determine the money multiplier and the money supply for each reserve requirement listed in the following table. Reserve Requirement Simple Money Multiplier Money Supply (Percent) (Dollars) 25 10 A lower reserve requirement...
8. The reserve requirement, open market operations, and the money supply Assume that banks do not...
8. The reserve requirement, open market operations, and the money supply Assume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is demand deposits. To simplify the analysis, suppose the banking system has total reserves of $300. Determine the money multiplier and the money supply for each reserve requirement listed in the following table. Reserve Requirement        Simple Money Multiplier                Money Supply ($$)       (Percent)           5   (0.5,...
Economists occasionally speak of “helicopter money” as a short-hand approach to explaining increases in the money...
Economists occasionally speak of “helicopter money” as a short-hand approach to explaining increases in the money supply. Suppose the Chairman of the Federal Reserve flies over the country in a helicopter dropping 10,000,000 in newly printed $100 bills (a total of $1 billion). By how much will the money supply increase if, holding everything else constant: a. all of the new bills are held by the public? b. all of the new bills are deposited in banks that choose to...
Show the changes to the T-accounts for the Federal Reserve and for commercial banks when the...
Show the changes to the T-accounts for the Federal Reserve and for commercial banks when the Federal Reserve buys $50 million in U.S. Treasury bills. If the public holds a fixed amount of currency (so that all loans create an equal amount of deposits in the banking system), the minimum reserve ratio is 10%, and banks hold no excess reserves. Show the initial change in the balance sheet for Federal Reserve (use + to indicate an increase and – to...
Suppose the Federal Reserve conducts and open market purchase of $800. The nonbank public holds the...
Suppose the Federal Reserve conducts and open market purchase of $800. The nonbank public holds the same fraction of currency relative to deposits. Banks hold the same fraction of excess reserves, and the Fed keeps the reserve requirement unchanged. Compute the change in the monetary base, and the change in the money supply and be sure to indicate the direction of the change in both variables.
Which of these increase or decrease the money supply? A) Federal Reserve buys bonds in open-market...
Which of these increase or decrease the money supply? A) Federal Reserve buys bonds in open-market operation. B) Federal Reserve reduces the reserve requirement. C) Federal Reserve increases the interest rate it pays on reserves. D) Citibank repays a loan it had previously taken from the Federal Reserve. E) After a rash of pickpocketing, people decide to hold less currency. F) Fearful of bank runs, bankers decide to hold more excess reserves. G) The FOMC increase its target for the...
1. The three players in the money supply process include A. Banks, depositors and the US...
1. The three players in the money supply process include A. Banks, depositors and the US Treasury B. Banks, borrowers and the Fed      C. Banks, depositors and the Fed D. Banks, depositors and borrowers 2. The monetary base consists of:      A. Currency in circulation and Federal Reserve notes      B. Currency in circulation and the US treasury’s monetary liabilities      C. Currency in circulation and reserves      D. Reserves and vault cash 3. When the Fed wants to...
1.When the Federal Reserve sells securities to a commercial bank the monetary base------ and reserves------- A....
1.When the Federal Reserve sells securities to a commercial bank the monetary base------ and reserves------- A. Remains unchanged; decrease B. Remains unchanged; increase C. Decrease; decrease D. Decrease; remain unchanged 2. If the required reserve ratio is 15 percent, currency in circulation is $400 Billion, checkable deposits are $800 billion, and excess reserves are $0.8 billion , then the M1 multiplier is A. 2.5 B. 1.67 C. 2.3 D. .651 3. If the nonbank public elects to holds more currency...
3. An economy has a monetary base of 1,000 $1 bills. Calculate the money supply in...
3. An economy has a monetary base of 1,000 $1 bills. Calculate the money supply in scenarios a - d. Then answer part e. a. All money is held as currency Money Supply = $ b. All money is held as demand deposits. Banks are required to hold 100% of deposits as reserves. Money Supply = $ c. All money is held as demand deposits. Banks hold 20% of deposits as reserves. Money Supply = $ d. People hold equal...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT