Question

U.S. Economy Data Value $100 Billion $50 Billion $1 Billion $30 Billion Category Total Reserves (asset for private banks, kept at Federal Reserve) Currency (assets for firms, households) Value of Euros in the U.S. (assets for private banks, firms, households, etc.) U.S. Gov't bonds (assets for private banks, firms, households, etc.) Demand deposits (liability for private banks) Corporate and consumer loans (asset for private banks) Mortgage loans (asset for private banks) Certificates of Deposit, CDs (liability for private banks) Reserve requirement on demand deposits $1 Trillion $400 Billion $485 Billion $10 Billion .10 1) Given the above data about the U.S. economy (assume anything not listed is equal to zero): a. What is the money supply (M1)? b. What is the total amount (in $) of reserves that banks are legally required to keep? c. What is the total amount (in $) of reserves that banks have on hand to lend? C. 2) If Federal Reserve buys $20 Billion in bonds from private banks: a. What is the total amount in $) of reserves that banks now have on hand to lend? b. Using the simple deposit multiplier, how much additional money (M1) is created by this process? What will happen to the Federal Funds Rate, the prime rate, and other nominal interest rates in the economy? (Go up, down, stay the same?) Why? d. What effect will this policy have on investment expenditure? Why? e. What effect will this policy have on consumption expenditure? Why? f. Is this monetary policy or fiscal policy? Contractionary or expansionary? Explain. g. Thinking about the relationship between aggregate demand, short-run aggregate supply, and long-run aggregate supply: i. When would this policy be appropriate? Explain. ii. When would this policy be inappropriate? Explain.

Answer 1

Question 1 Answer :

(A):-

=> M1 is the measurement for money supply in economy.

M1 include currency and notes , Demand deposit , travellers check etc.

here M1 = currency + demand deposits

= $50 billions + $1 trillions

= $1.05TRILLIONS

so M1 is $1.50 trillions

(B):-

legally reserve required = total deposit * reserve ratio

= $1 trillions *0.10

= $100 billions reserve is legally

(C):-

Total reserve should lend by banks is excess reserve

Excess reserve = total reserve - required reserve

= $100 billions - $100 billions

= 0

so the Bank can not lend reserve any amount because no any excess reserve.