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Unformatted text preview: The three situations given here are: 1. The Fed buys securities in the open market. 2. The reserve requirement is increased. 3. Consumers reduce their spending and increase saving. The first case, that of the Fed buying securities in the open market increases money supply. This is because the Fed pays cash in return for securities, thus ensuring that the reserves of banks exceed the required level. The banks can then generate more loans with the excess reserve. Increased money supply will shift the money supply curve to the right, and since money demand is not changing, the equilibrium shifts to the right. This means the quantity of money in the market goes up, and the equilibrium interest rate falls. See Figure 1 in the attachment. The second case is of increasing reserve requirement. Reserve requirements specify the percentage of deposits that commercial banks have to keep with the Federal Reserve. When this requirement is increased it means that the ability of banks to generate loans falls. Reserve requirements also end up increased it means that the ability of banks to generate loans falls....
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This note was uploaded on 08/04/2010 for the course ECO 2072 taught by Professor Whittle during the Spring '10 term at Southeaster Oklahoma State University.
- Spring '10