Suppose the federal reserve sets the reserve requirement at 8%, banks hold no excess reserves, and no additional currency is held.a. what is the money multiplier?instructions: round your answer to 1 decimal place.b. how much will the total money supply change by if the federal reserve changes the amount of reserves by –$70 million?instructions: include a negative sign (-) if necessary.$millionc. suppose the federal reserve wants to increase the total money supply by $400 million. how much should the federal reserve increase reserves to achieve this goal?
a. Money multiplier = 1/R, where R is reserve ratio (given, 8%= 0.08)
So, money multiplier = 1/0.08 = 12.5 (which has 1 decimal place)
b. Change in money supply = change in amount * money multiplier = -$70 M * 12.5
= - $875 million (negative sign indicates decrease in money supply)
c. Required increase in reserve = (Required increase in money supply)/(money multiplier)
= $400M/12.5 = $32 million
So, amount of $32 million should be increased to achieve the goal
