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Reserve Rate in macroeconomics

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1. Assume Company X deposits $80,000.00 in cash in commercial bank Y. If no excess reserves exist at the time this deposit is made and the reserve ratio is 30%, then bank Y can increase the money supply by a maximum of ???

2. If the required reserve ratio is 15% and commercial bankers decide to hold additional reserves equal to 10%, what would be the relevant deposit expansion multiplier??

3. If (1) the current interest rate is 6%, (2) at 6% interest rate a business investment is $3 billion and at 4% business investment would be $5 billion, (3) the MPC is 0.75, and (4) the Fed buys securities and lowers the interest rate by 2%, what would happen to GDP?

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1. Assume Company X deposits $80,000.00 in cash in commercial bank Y. If no excess reserves exist at the time this deposit is made and the reserve ratio is 30%, then bank Y can increase the money supply by a maximum of ???

80'000 / 30% = 80'000/0.3 = +500'000 = 266,666.67.

2. If the required reserve ratio is 15% and commercial ...

Solution Summary

GDP and the reserve rate in macroeconomics is emphasized in the solution.

$2.19
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Questions: Describe three ways in which the Federal Reserve can change the money supply. If the Federal Reserve is going to adjust all of these tools during an economy that is growing too quickly, what changes would they make? If the Federal Reserve is going to adjust all of these tools during an economic recession, what changes would they make? What changes, if any, to the current condition of these tools would you make at the next meeting of the Federal Reserve? Explain why and the benefits/drawbacks of this strategy. Describe each tool and how it is used to achieve it desired effect on the US money supply
State how the FED will use each tool to achieve the desired effect on the US money supply

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