Posted by Debbie on .
Suppose the money supply is currently 500 billion and the Fed wishes to increase it by 100 billion. Given a required reserve ratio of .25, what should it do?
I am not entirely sure of this but I will explain from what I know. The reserve ratio is the amount of money banks have to have on hand. For example, if a bank had 100 dollars, it is required to keep 25% of it if the ratio os .25. The other 75 can be lent. So 75 is in the money supply. This means that for a reserve ratio of .25, only 75% of the newly added funds go into the money supply. so if the fed wants to increase by 100 mil, it would need to inject .75X=100
X= 400/3 million dollars. Make sense?
Show how each of the following initially affects bank assets, liabilities, and reserves. Do not include the results of bank behavior resulting from the Fed’s actions. Assume a required reserve ratio of 0.05.
a. The Fed purchases $10 million worth of U.S. government bonds from a bank.
b. The Fed loans $5 million to a bank.
c. The Fed raises the required reserve ratio to 0.10.