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What is the potential impact on the money supply

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Suppose in the Republic of Madison that the regulation of banking rested with the Madison Congress, including the determination of the reserve ratio. The Central Bank of Madison is charged with regulating the money supply by using open market operations. In April 2011, the money supply was estimated to be 52 million hurls. At the same time, bank reserves were 6.24 million hurls and the reserve requirement was 12 percent. The banking industry, being "loaned up," lobbied the Congress to cut the reserve ratio. The Congress yielded and cut required reserves to 10 percent. What is the potential impact on the money supply? Suppose the central bank decided that the money supply should not be increased. What countermeasures could it take to prevent the Congress from expanding the money supply?

Reference no: EM1392779

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