Suppose that the reserve requirement is 5%.If the Fed

Question A

Suppose that the reserve requirement is 5%.If the Fed buys $1 million in bonds from the First national Bank, what is the total deposit creation in the banking system using the simple deposit multiplier?

Question B

Consider the preceding question using the money multiplier. If the currency ratio is 20%and the excess reserve ratio is 1%, what is the change in money supply?

Question C

If the reserve requirement were eliminated, what effect would this have on the size of the money supply?

Question D

In farming communities, local banks need to make large loans in spring to finance crops.

The local bank, although often guaranteed by the government, makes these loans.If all of the farmers in this region were to purchase seed in May, what would be the affect on the money multiplier equation in late April? If this were a closed economy (Iowa was anation), how could the Federal Reserve maintain a constant Money Supply inlight of this situation?

Question E

What is the practical justification of the reserve requirement, besides as a monetary policy tool?