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Business, 13.12.2019 17:31 srickie85

The following is a dialogue between two economics students who are studying for a test. assuming that eleanor correctly explains the money supply, fill in the blanks.

darnell: i totally stopped paying attention in today's lecture. did the professor talk about how the fed controls the money supply?
eleanor: yeah, the fed controls the amount of currency directly through open-market operations, and it controls indirectly through .
darnell: what do you mean "indirectly"?
eleanor: the fed specifies the of deposits that banks must hold in reserve. the lower the reserve requirement, the total money the banks can lend out. banks usually hold some of their reserves in the form of highly liquid, interest-paying assets. these assets are called .
darnell: ok, so the money supply is determined by the fed and the banks?
eleanor: well, also affect the money supply through their preferences for holding currency. so really, all three parties affect the amount of checkable deposits, but only the total amount of currency in circulation.
darnell: ok, so the fed doesn't have complete control.
eleanor: in theory, the fed could completely control the money supply, but only under a system of . in that case, the money supply would be entirely determined by the amount of currency in circulation.

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