Question

Suppose the reserve requirement is initially set at 8%. 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 8%, what is the value of the money multiplier? b. If the reserve requirement is 8% and the Fed increases reserves by $30 billion, what is the total increase in the money supply? $ billion c. Suppose the Fed raises the reserve requirement to 15%. What is the value of the money multiplier now? d. Assume the reserve requirement is 15%. If the Fed increases reserves by $30 billion, what is the total increase in the money supply? $ billion e. Raising the reserve requirement from 8% to 15% (Click to select) the money multiplier and (Click to select) the money supply.

Answer 1

(a) Money multiplier = (1 / reserve requirement ratio)

Money multiplier = (1 / 0.08) = 12.5

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(b) change in money supply = money multiplier * change in reserves

=> change in money supply = 12.5 * $30 billion

=> change in money supply = $375 billion

Thus, total increase in money supply is $375 billion

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(c) Money multiplier = (1 / reserve requirement ratio)

Money multiplier = (1 / 0.15) = 6.67

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(b) change in money supply = money multiplier * change in reserves

=> change in money supply = 6.67 * $30 billion

=> change in money supply = $200 billion

Thus, total increase in money supply is $200 billion

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(e) Raising the reserve requirement from 8% to 15% decrease the money multiplier and decrease the money supply.