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Author Question: The Fed conducts an open market operation and increases a bank's excess reserves by 2,000. ... (Read 85 times)

viki

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on: Jun 29, 2018
The Fed conducts an open market operation and increases a bank's excess reserves by 2,000.
 
  Explain the first five rounds of the money creation process if the desired reserve ratio is 25 percent and if people keep no currency outside of the banking system.

Question 2

Refer to the scenario above. The demand for Go's soccer balls is 2,500 units if ________.
 
  A) the price charged by Sporty is higher than the price charged by Go
  B) the price charged by Go is higher than the price charged by Sporty
  C) the price charged by Sporty is equal to the price charged by Go
  D) the price charged by Go is higher than the cost of producing a ball


abro1885

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Reply #1 on: Jun 29, 2018
Answer to Question 1

In round one, the bank gains 2,000 of reserves which it lends. The next bank receives as a deposit the amount of the loan. The bank keeps 500 as desired reserves and lends 1,500. In round three, the third bank receives the 1,500 in a deposit. It keeps 25 percent, or 375, as desired reserves and lends the rest, 1,125. In round four, the fourth bank receives the 1,125 in a deposit. It keeps 25 percent, 281.25, as desired reserves and lends the remainder, 843.75. Finally in round five, the next bank receives the 843.75 in a deposit. It keeps 210.94 as desired reserves and lends the rest, 632.81.

Answer to Question 2

A


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