The Federal Reserve has the ability to manipulate/change the…
Questions
The Federаl Reserve hаs the аbility tо manipulate/change the mоney supply by cоntrolling the monetary base through reserve accounts. However, the banking industry plays a crucial role in the money supply process through multiple deposit creation. The multiple increase in deposits generated from an increase in the banking system’s reserves is called the simple deposit multiplier which is used in the formula to calculate the resulting change in the money supply. a) Briefly explain the model highlighting its’ flaws and the three main players in the money supply process. b) In the simple deposit expansion model, if the required reserve ratio is 20% and the Fed increases reserves by $100, checkable deposits can potentially expand by how much? c) Based on the bank’s role in the money supply process, would a shift in demand from depository accounts to currency in hand increase or decrease the money supply? d) Briefly explain your reasoning in part (c).
The Federаl Reserve hаs the аbility tо manipulate/change the mоney supply by cоntrolling the monetary base through reserve accounts. However, the banking industry plays a crucial role in the money supply process through multiple deposit creation. The multiple increase in deposits generated from an increase in the banking system’s reserves is called the simple deposit multiplier which is used in the formula to calculate the resulting change in the money supply. a) Briefly explain the model highlighting its’ flaws and the three main players in the money supply process. b) In the simple deposit expansion model, if the required reserve ratio is 20% and the Fed increases reserves by $100, checkable deposits can potentially expand by how much? c) Based on the bank’s role in the money supply process, would a shift in demand from depository accounts to currency in hand increase or decrease the money supply? d) Briefly explain your reasoning in part (c).
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