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Tutorial Chapter 29 - have fewer reserves and the money...

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Tutorial Chapter 29 Question 1 a) Medium of exchange, store of value, unit of account b) Store of value c) Store of value Question 2 When the reserve requirement is less than 100 percent, banks can lend out deposits. The money they lend out is redeposited. In this way, deposits can be greater than reserves. Since deposits are greater under fractional-reserve banking and since deposits are part of the money supply, the money supply will be greater under fractional reserve banking. Question 3 First, the Fed does not control the amount of currency that households choose to hold the relative to deposits. If households decided to hold relatively more currency, banks
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Unformatted text preview: have fewer reserves and the money supply decreases, Second, the Fed cannot control the amount banks choose to hold as excess reserves. If bankers decide to lend out less of their deposits, the money supply will decrease. Question 4 a) The money multiplier is 1/0.1 = 10, therefore money supply is 100*10 = 1000 billion or 1 trillion. b) If the Fed raises reserve requirement reserves remain unchanged, the money multiplier falls to 5 and the money supply falls to $500 billion. Question 5 a) Buy more b) Decrease c) Decrease d) 8 million (20% x 40million)...
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