Question

Question 1. (15 points) Suppose that currency in circulation is $600 billion, the amount of chequable deposits is $900 billion, and excess reserves are $15 billion and the desired reserve ratio is 10%. a. Calculate the money supply, the currency 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 $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. C. Suppose the central bank conducts the same open market purchase as in part (b) except that banks choose to hold all 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 M1 money multiplier was below one for most of the time from October 2008 through 2011. How does this scenario relate to your answer to part (c)?

Answer 1

Answer given data boo Billion Currency in circulation Checkable deposits - 900 Billion - 15 Billion Excess reserves 10% desired reserve rato Money supply = currency in circulation + checkable deposits 60064 900 (B) 1500 & Billion * currency deposit ratio : currency in circulation (checkable deposita. goo (B) 600 (6) = 0667 66.67. Excess ratio Excess reserves Checkable deposits 00 0167 jie, 15 (6) 1-67%. 900(B) * Monetary Base Currency + Total reserve 600 CB) +15 (B) + 900(B)* 10% - 705 $ (billion

Money Multipliera = Money supply Monetary Base $1500 (B) / 705 By 2.13 Increase in Money supply * = 1400 Billion Money Multiplier = 1400 (B) 2013 2982 Billion, Money supply anercases. By $ 2982 Billion.