Question

For each event described, determine the affect on the monetary base, the money multiplier, and the money supply. Whether it increases, decreases, may increase or decrease, or no change.a. The Federal Reserve buys bonds using open market operations.b. The Fed increases the interest rate it pays banks for holding reserves.c. The Fed reduces its lending to banks through its Term Auction Facility.d. Rumors about a computer virus attack on ATMs increase the amount of money people hold as currency rather than demand deposits.e. The Fed flies a helicopter over 5th Avenue in New York City and drops newly printed $100 bills.

Answer 1

The events described can have various effects on the monetary base, money multiplier, and money supply. The specific impact depends on the actions taken by the Federal Reserve and the choices made by banks.

Step-by-step explanation:

For each event, here is how it affects the monetary base, money multiplier, and money supply:

1. a. When the Federal Reserve buys bonds through open market operations, it increases the monetary base. The money multiplier and money supply may increase, depending on how banks choose to use the new reserves generated by the bond purchase.
2. b. If the Fed increases the interest rate it pays banks for holding reserves, it incentivizes banks to hold more reserves. This reduces the money multiplier and money supply.
3. c. When the Fed reduces its lending to banks through its Term Auction Facility, it decreases the monetary base. The money multiplier and money supply may decrease as a result.
4. d. When rumors about a computer virus attack on ATMs increase the amount of money people hold as currency rather than demand deposits, it reduces the monetary base and money multiplier. The money supply may decrease.
5. e. When the Fed flies a helicopter over 5th Avenue in New York City and drops newly printed $100 bills, it increases the monetary base. The money multiplier and money supply may increase, depending on how banks choose to use the new reserves generated by the cash injection.