Question

Now, suppose that, rather than immediately lending out all excess reserves, banks begin holding some excess reserves due to uncertain economic conditions. Specifically, banks increase the percentage of deposits held as reserves from 10% to 20%. This increase in the reserve ratio causes the money multiplier to _________ to _________. Under these conditions, the Fed would need to ________. $ ________ worth of U.S. government bonds in order to increase the money supply by $100.

Answer 1

To fall to 4/ to buy $100.00, $50.00

Step-by-step explanation:

Step-by-step explanation:

Some Unpredictable economic problems causes banks to hold some excess reserves, thereby increasing the percentage of minimum deposits held as reserves from 10% to 25% and the reserve ratio will increase from 1/10 to 1/4. The multiplier drops from 10 to 4 , the fraction of the new reserve ratio will be (1/4).

An additional reserves holding by the bank, the Federal government have no option than to buy more bonds in order to increase the money supply by a given amount. An open - market buys bonds worth $50(instead of $20) is now needed to increase the money supply by $200. When the Federal government buys $50 in government bonds, checkable deposits and bank reserve will rise to $50.

Answer 2

• fall
• 5
• buy
• $20

Step-by-step explanation:

when the reserve ratio of a bank is increased the money multiplier will decrease ( fall ) since the reserve ratio increased to 20% the money multiplier which is calculated as = I / reserve will now become

= 1 / 0.2 = 5

To increase the money supply to $100 since the banks increased the reserve ratio of the bank the government will need to buy the required bond.

to get the actual value of the required bond = the required increase / money multiplier = $100 / 5 = $20