Part A

Some economists have advocated replacing government deposit insurance with 100-percent reserve banking. Under this plan, banks would hold all deposits as reserves. Deposit insurance would no longer be necessary, because banks would always have the reserves to meet customer withdrawals.

a. What would happen to the money supply (defined as currency and bank deposits) in the transition from fractional reserve to 100-percent reserve, if this plan were implemented, holding other factors constant?

b. What will be the value of the money multiplier?

Part B The Federal Reserve has three tools to control the money supply: open-market operations, the discount rate, and reserve requirements.

a. How should each instrument be changed if the Fed wishes to decrease the money supply?

b. Will the change affect the monetary base and/or the money multiplier?