Question

1. Suppose that currency in circulation is $600 billion, the amount of checkable deposits is $900 billion, required reserve on checkable deposits is 10% and excess reserves are $15 billion. a. Calculate the money supply, the currency deposit ratio, the excess reserve ratio, and the money multiplier. Suppose the central bank conducts an unusually large open market purchase of bonds held by banks of $1400 billion due to a sharp contraction in the economy. Assuming the ratios, you calculated in part (a) remain the same, predict the effect on the money supply. Suppose the central bank conducts the same open market purchase as in part (b), except that banks choose to hold all of these proceeds as excess reserves rather than loan them out, due to fear of a financial crisis. Assuming that currency and deposits remain the same, what happens to the amount of excess reserves, the excess reserve ratio, the money supply, and the money multiplier? d. During the financial crisis in 2008, the Federal Reserve began injecting the banking system with massive amounts of liquidity, and at the same time, very little lending occurred. As a result, the MI money multiplier was below 1 for most of the time from October 2008 through 2011. How does this scenario relate to your answer to part (c)?

Answer 1

(ex V Denne 1) Giveni Currency (Cu) = 600 ; Deporib (D)= 900; posti Required reserve Ratio (re)=0.1 and ER=15 a) Now, Money Pupply (MC) = CU+D = 1500 Gunnancy - Depopir vatio (c) = CU = 600 = 066] - 900 Excess Reserve vatio (ev)= ER = 15 -10,0167] money-Multiplier (M)= Itea a 2x 2,13721 D 900 cu tret er мал - Риелі | who , H = money Б) 60, M = ДмоY, Дмс и ДН AH 1372 or, Rasz=1 : AM=(2, 1962) (1400) - Botas Ba| 2992.1461 Clearly, ma inness by $3067469 ta $ 2992.146

Niew ER= (1 400 +15) =1915 – ER* New ev, er* = ER* = 1.572 = 10.7118] New mm, mm A ltcu autrrtert ao New AM, AM* = OH-mw = 1996.5691 СОсоли на экрээлгі атлаан лоололу бири а рlу did not have its desined effects

d) During the 2008 Financial Crisis, M₁ multiplier was less than one. As a result, monetary policy could not provide the desired stimulus, as banks were pessimistic of bad loans piling up post crisis and did not lend as expected by the Fed. This resulted in a slowdown in the credit creation process from (2008-2011).

Even in part c), we see a similar impact arising out of a M₁ multiplier, less than one.