Posted: January 25th, 2021
Please complete the attached excel graph and answer questions
Money Supply & The Federal Reserve System
Using what you learned in Chapter 10, complete the problems on the assignment (link on the previous page). This assignment will look at how banks hold money, how the multiplier is calculated and how changes in Monetary policy by the Federal Reserve will impact your savings and ability to borrow.
Grading: 6 points for #1, 6 points for #2, 3 points for #3 and 5 points for #4 for a total of 20 points.
Using what you learned in Chapter 10, complete the problems on the attached page. This assignment will look at how banks hold money, how the multiplier is calculated and how changes in Monetary policy by the Federal Reserve will impact your savings and ability to borrow.
When you deposit money into a bank, do you know what happens to it? It doesn’t simply sit there. Banks are actually allowed to loan out up to 90% of their deposits. For every $10 that you deposit, only $1 is required to stay put.
This practice is known as fractional reserve banking. Now, it’s fairly rare for a bank to only have 10% in reserves, and the number fluctuates. Since checkable deposits are part of the U.S. money supplies, fractional reserve banking, as you might have guessed, can have a big impact on these supplies.
This is where the money multiplier comes into play. The money multiplier itself is straightforward: it equals 1 divided by the reserve ratio. If reserves are at 10%, the minimum amount required by the Federal Reserve, then the money multiplier is 10. So if a bank has $1 million in checkable deposits, it has $10 million to work with for stuff like loans and reserves.
Now, typically, the money multiplier is more like 3, because banks can always hold more in reserves than the minimum 10%. When the money multiplier is higher, like during a boom, this gives the Fed more leverage to move M1 and M2 with a small change in reserves. But when the multiplier is lower, such as during a recession, the Fed has less leverage and must push harder to wield its indirect influence over M1 and M2. Here’s the MR University video to help you complete your assignment.
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