Asked by Kiera Turner on May 01, 2024
Verified
Explain how each of the following changes the money supply.
a.the Fed buys bonds
b.the Fed auctions credit
c.the Fed raises the discount rate
d.the Fed raises the reserve requirement
Money Supply
The overall financial capital available in an economy at a particular moment.
Discount Rate
The interest rate charged to commercial banks and other financial institutions for the loans they receive from the central bank's discount window.
Reserve Requirement
Regulations set by central banks determining the minimum amount of reserves each bank must hold as a proportion of its deposits.
- Expound on the theory of monetary policy and its repercussions on the money supply.
- Explain how open market operations, reserve requirements, and discount rates influence the circulation of money.
Verified Answer
JG
Juliana GalloMay 04, 2024
Final Answer :
a. If the Fed buys bonds, it pays for them with reserves so banks will have more reserves and can lend more which will create more deposits and so more money.
b.The Fed makes loans to the highest bidders. The Fed lends to a bank by increasing the banks' deposits at the Fed which are part of reserves. When reserves increase banks have more to lend and so the money supply increases.
c.If the Fed raises the discount rate banks will borrow less from the Fed, and so have fewer reserves, which decreases the money supply.
d.If the Fed raises the reserve requirement, banks will have to hold more of their deposits as reserves and so will have less to lend out. With less to lend out, deposits and the money supply decrease.
b.The Fed makes loans to the highest bidders. The Fed lends to a bank by increasing the banks' deposits at the Fed which are part of reserves. When reserves increase banks have more to lend and so the money supply increases.
c.If the Fed raises the discount rate banks will borrow less from the Fed, and so have fewer reserves, which decreases the money supply.
d.If the Fed raises the reserve requirement, banks will have to hold more of their deposits as reserves and so will have less to lend out. With less to lend out, deposits and the money supply decrease.
Learning Objectives
- Expound on the theory of monetary policy and its repercussions on the money supply.
- Explain how open market operations, reserve requirements, and discount rates influence the circulation of money.