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 25%. 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 $200.

Which of the following statements help to explain why, in the real world, the Fed cannot precisely control the money supply? Check all that apply.

The Fed cannot control the amount of money that households choose to hold as currency.

The Fed cannot prevent banks from lending out required reserves.

The Fed cannot control whether and to what extent banks hold excess reserves.

Answer 1

The correct answer is The Fed cannot prevent banks from lending out required reserves.

The Fed cannot control whether and to what extent banks hold excess reserves.

Step-by-step explanation:

The FED presents a series of limitations in relation to the management of reserves due to the fact that there are a series of effects on the market that do not allow precise control. This group would include the condition of banks as lending agents of reserves and control over excessive reserves, given that in the face of a saturation process there is not full certainty about the disposition of monies by financial institutions.