Suppose the Banks Acquire $100 Billion in Additional Reserves,banks Hold

question 9

Essay

Suppose the banks acquire $100 billion in additional reserves,banks hold 10% reserves,and the cash-to-deposit ratio is 15%.
(a)What is the money supply?
(b)Suppose the Fed wants to increase the money supply so it undertakes a $10 billion open market purchase but at the same time people decide to hold twice as much cash as they did before.Will the Fed be successful in its attempt to increase the money supply? Explain.
(c)What lesson for monetary policy can you deduce from your answer to (b)?

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