Question

Suppose that currency in circulation is $800 billion, the amount of checkable deposits is $1200 billion, the required reserve ratio is 10% and excess reserves are $12 billion a. Calculate the money supply, the currency-to-deposit ratio, the excess reserve ratio, and the money multiplier b. Suppose the central bank conducts an unusually large open market purchase of bonds held by banks of $2000 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 and bank run. 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. Go to the FRED web site and graph the Fed's M1 multiplier. How does the scenario in part crelate to the graph you created? Include your graph in your submission Previous Next

Please Please answer if you are Expert and you know the answer 100% correct. Also, please include the Fred graph, and send the graph link and explain how to get the graph as you got it. thank you

Answer 1

a) Money supply: MEC + D .currency Deposit =(800+1280) billion = 2000 B werency to deposit (cd) - soo doo 2 Excess reserve natio (Er) 2 E = ióo 1+ ra cá Money multiplier (m) :- 1. Rrt Cat Er af lww ti õl t + lelor 30 + 3 +200 300 100 5 X 100 233 500 233 = 2:1459 b) Due to purchase money supply rises by multiplier a time of initial supply. :AM = mx 2000 B = 42918 B - eg As bank held 2000 B in reserve the excess reserve mises by 2000B. ::ER (12 + 2000)B= 2012 B :: Er = 2012. = 1.68 1200 .: MEC+0 = 2000B im 1 + 23 0:1 +1.68 +0.67 -0.681 d) from the graph it is evident that the multiplier decreased sigrificantly during financial crisis.

M1 Money Multiplier, Ratio, Annual, Seasonally Adjusted 2.000 1.800 1.600 1.400 1.200 1.000 0.800 0.600 0.400 0.200 0.000 2010-01-01 2012-01-01 2016-01-01 2011-01-01 2013-01-01 2014-01-01 2015-01-01 2017-01-01 2018-01-01 2019-01-01 2000-01-01 2001-01-01 2002-01-01 2003-01-01 2004-01-01 2005-01-01 2006-01-01 2007-01-01 2008-01-01 2009-01-01

This is exactly the scenario given in part (d).