the supply of money increases when: course hero

What happens to the money supply when the reserve requirement decreases?

Supply of Money. If the Fed increases the reserve requirement, the money multiplier decreases, implying that deposit creation and the money supply are reduced. If the Fed decreases the reserve requirement, the money multiplier increases, causing both the creation of deposits and the money supply to expand further.

What is the supply of money controlled by?

Central banking and the supply of money. A portion of each nation's money supply (M 1) is controlled by a government agency known as the central bank. The central bank is unique in that it is the only bank that can issue currency. The U.S. central bank is called the Federal Reserve Bank but is frequently referred to as “the Fed.”

How does the Fed increase the amount of money in circulation?

Banks, in turn, lend out their excess reserves and initiate the multiple deposit expansion process discussed above. Thus, when the Fed buys U.S. government bonds on the open market, it increases the supply of money by increasing bank reserves and inducing an expansion in the amount of deposits.

What is M1 and m2 in money supply?

M 1 is narrowest and most commonly used. It includes all currency (notes and coins) in circulation, all checkable deposits held at banks (bank money), and all traveler's checks. A somewhat broader measure of the supply of money is M 2, which includes all of M1 plus savings and time deposits held at banks.

What is the supply of money?

M 1 is narrowest and most commonly used. It includes all currency (notes and coins) in circulation, all checkable deposits held at banks (bank money), and all traveler's checks. A somewhat broader measure of the supply of money is M 2, which includes all ...

What happens to the money multiplier when the Fed increases the reserve requirement?

If the Fed increases the reserve requirement, the money multiplier decreases, implying that deposit creation and the money supply are reduced. If the Fed decreases the reserve requirement, the money multiplier increases, causing both the creation of deposits and the money supply to expand further.

How does the Fed reduce the supply of money?

The sale of government bonds by the Fed reduces the supply of money by reducing the reserves available to private banks and thereby decreasing the amount of deposit expansion that is possible. The Fed can also control the supply of money by its choice of the reserve requirement.

What is the Fed's open market operation?

For example, the Fed may decide to purchase additional government bonds on the open market from bondholders or private banks. This type of action is referred to as an open market operation by the Fed. In exchange for these government bonds, the Fed increases the reserves of private banks by the amount of the purchase.

How do banks use funds from depositors?

First, they receive funds from depositors and , in return, provide these depositors with a checkable source of funds or with interest payments. Second, they use the funds that they receive from depositors to make loans to borrowers; that is, they serve as intermediaries in the borrowing and lending process.

What is reserve requirement?

The reserve requirement is the fraction of deposits set aside for withdrawal purposes. The reserve requirement is determined by the nation's banking authority, a government agency known as the central bank. Deposits that banks are not required to set aside as reserves can be lent to borrowers, in the form of loans.

What is a bank's liabilities?

Liabilities are valuable items that the bank owes to others and consist primarily of the bank's deposit liabilities to its depositors. In Table , the bank's assets (reserves and loans) total $1 million. The bank's liabilities (deposits) total $1 million. A banking firm's assets must always equal its liabilities.