The Fed Makes an Open-Market Purchase of $5 Million in an Economy

question 11

Essay

The Fed makes an open-market purchase of $5 million in an economy in which no bank holds excess reserves and the assumptions of the simple multiplier hold with a reserve requirement of 8 percent.Draw up a table to show the amount of new deposits in each new bank (show the amounts in the first five of them), the additional reserves held by that bank, and the loans made by that bank, as each successive bank lends out its excess reserves.Finally, calculate the total amount of new deposits, of additional reserves, and of loans made in the economy.

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Definitions:

Mass Movements

Large groups of people engaging collectively in political, social, or cultural campaigns to bring about or resist change in society.

Offers of Reforms

Proposals or pledges to make changes or improvements, typically in political, social, or economic systems.

Compounded Semiannually

Interest on an investment that is calculated twice a year and added to the principal sum.

Initial Deposit

The first sum of money placed into an account or investment, serving as the starting balance.