Changing the reserve requirement

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Assume that the money supply consists entirely of bank deposits and is $1 trillion (10^12). The reserve requirement of the central bank is 10%.

a. How large are bank reserves?

b. The central bank wants to raise interest rates because it thinks Y is close to potential GDP. Suppose it wants to use open market operations. What will it do to change the money supply by 5%? (Your answer is a number.) Explain.

c. Suppose it conducts monetary policy by changing the reserve requirement (R). What change in R will change the money supply by 5% in the right direction?

Reference no: EM132795283

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