Problem 9
Analyzing Data The Fed sets the required reserve ratio at 10 percent. What is the initial deposit if the money supply increases by \(\$ 40,000 ?\) Use the deposit multiplier formula to determine your answer and show your calculations.
Problem 10
Banks do not earn interest on the funds they hold as reserves. How does this provide an incentive to banks to create money by making loans rather than to deposit excess funds in a Fed bank?
Problem 10
Challenge Explain how the Fed buying bonds affects interest rates, aggregate demand, price level, and GDP. Illustrate your answer using two graphs, one showing the money market and one showing aggregate supply and aggregate demand.
