What new policy tools for controlling reserve balances did the Fed introduce during the Financial Crisis of 2007-2009?
What will be an ideal response?
The Fed began to pay interest on reserves. By paying a higher interest rate, it can encourage banks to maintain their reserve holdings. The term deposit facility gives the Fed another tool in managing bank reserve holdings. The more funds banks place in term deposits, the less they will have available to expand loans and the money supply.
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Assume the required reserve ratio is 20 percent and the FOMC orders an open market purchase of $100 million in government securities from member banks. If the oversimplified money multiplier is assumed, then the money supply will
a. increase by $500 million. b. increase by $100 million. c. decrease by $100 million. d. decrease by $500 million.
If the Fed sells $5 million in government bonds, how much will the money supply change?
a. It will increase by $5 million. b. It will increase by more than $5 million. c. It will decrease by $5 million. d. It will decrease by more than $5 million.