Calculations for multiplier and determining Federal Reserve with the given information as well as explanation for opportunity cost of holding excess reserves.
1. Illustrate what is the opportunity price of holding excess reserves?
2.1. If a customer took $2,000 out in cash from a bank and the reserve ratio was 0.2, by how much would the supply of money be eventually reduced? (Use simple deposit multiplier for all questions.)
2.2. If the Federal Reserve undertakes an open market sale of $2 million and the reserve ratio is 0.15, by how much will the money supply decrease?
2.3. If the reserve ratio is 0.2 and a deposit of $100 is made into a bank, then how much will the bank lend out?
3. Occasionally, some economists or politicians suggest that the Secretary of the Treasury become a member of the Federal Open Market Committee. Explain how do you think this would affect the independence of the Fed?