Week+7+-+Ch29 - Chapter 29 The Monetary System Suggested...

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Chapter 29 The Monetary System Suggested solution Questions for Review 5. If the central bank wants to increase the supply of money with open-market operations, it purchases government bonds from the public on the open market. The purchase increases the number of notes in the hands of the public, thus raising the money supply. 8. Reserve requirements are regulations on the minimum amount of reserves that banks must hold against deposits. An increase in reserve requirements raises the reserve ratio, lowers the money multiplier, and decreases the money supply. Problems and Applications 3. For an asset to be useful as a medium of exchange, it must be widely accepted (so all transactions can be made in terms of it), recognized easily as money (so people can perform transactions easily and quickly), divisible (so people can provide change), and difficult to counterfeit (so people will not print their own money). That is why nearly all countries use paper money with fancy designs for larger denominations and coins for smaller denominations.
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