E the money multiplier the maximum value of the money

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E. The money multiplier. F. How changes in the legal reserve requirement affect the money supplyIf the legal reserve requirement is increased, excess reserves are reduced and the value of the money multiplier falls. A shortage of required reserves also could occur. An increase in the legal reserve requirement will reduce the money-creating ability of the banking system and could cause an actual decline in the money supply if the increase in the legal reserve requirement caused an actual shortage of required reserves. If the legal reserve requirement is reduced, the banking system will have more excess reserves and the value of the money multiplier is increased. Both of these effects will lead to an increase in the money supply. (text, pp. 372-373)
G. How open market operations affect the money supply. Open market operations involved by the purchase and sale of U.S. government bonds by the FED. If the FED enters the “open market” as a buyer of bonds, price rises will rise (and effective yields on bonds will fall) and excess reserves held by deposit-holding institutions will rise. The fall in effective bond yields may encourage firms to use bond financing for new investment projects. The increase in excess reserves provides a basis for a multiple expansion of the money supply (the amount to be determined by the actual value of the money multiplier). The money supply increase will cause interest rates to decline and investment expenditures to rise. The lower yields on existing bonds caused by the rise in bond prices may cause some firms to decide to use bond-financing (rather than borrowing funds from deposit-holding institutions) to buy new investment goods. Open market sales of bonds by the FED cause bond prices to fall and effective bond yields to rise. Excess reserves will be reduced and the ability of the banking system to create new deposits will be reduced. The extent of this reduction in the ability of the banking system to create money depends on the decline in excess reserves (caused by the open market operations) and the value of the money multiplier. (text, pp. 368-370)

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