Question

How would each of the following affect the U.S. money supply? Explain. 1. Banks decide to hold more excess reserves. (Excess reserves are reserves over and above what banks are legally required to hold against deposits.) 2. People withdraw cash from their bank accounts for Christmas shopping. 3. The Federal Reserve sells gold to the public. 4. The Federal Reserve reduces the interest rate it pays on deposits of depository institutions held at the Fed.

Answer 1

1. This will reduce the U.S. money supply because more excess reserves to be hold which means that less amount of money lend to the public.

2. This will not affect U.S. money supply because savings account is also a part of money supply.

3. This will reduce the U.S. money supply because there is a flow of money from public to Fed.

4. This will increase the money supply because it will be less profitable for the depository institutions to deposit at the fed. So, they start lending to the public which increases the money supply in the U.S. economy.