Macroeconomics

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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?

  • Macroeconomics -

    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?

  • Macroeconomics -

    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.

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