Fill This Form To Receive Instant Help
Fill This Form To Receive Instant Help
Homework answers / question archive / 1- Suppose that the required reserve ratio is 10%, currency in circulation is $400 billion, the amount of checkable deposits is $700 billion, and excess reserves are $50 billion
1- Suppose that the required reserve ratio is 10%, currency in circulation is $400 billion, the amount of checkable deposits is $700 billion, and excess reserves are $50 billion. a) Calculate the money supply, the currency deposit ratio, the excess reserve ratio, and the money multiplier. (10 pts) b) Suppose the central bank conducts an unusually large open market purchase of bonds held by banks of $ 800 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. (10 pts)
a) Currency to Deposit Ratio = Currency/ Deposits
Currency to Deposit Ratio =400/700
Currency to Deposit Ratio =0.5714
Excess reserve Ratio = Excess reserve / Deposit
Excess reserve Ratio= 50/700
Excess reserve Ratio= 0.0714
Reserves = Required Reserve + Excess Reserve
Reserves= r* D +ER
Reserves= (10%*700) +50
Reserves= 70+50
Reserves= 120
Monetary Base = Currency + Bank Reserves
Monetary Base = 400+ 120
Monetary Base = 400+120
Monetary Base = 520
Money Multiplier =( C/D+1)/(C/D +r+ER/D)
Money Multiplier= 1+ 0.5714/(0.5714+0.1+0.0714)
Money Multiplier= 1.5714/0.7428
Money Multiplier= 2.1155
Money Supply=Monetary Base * Money Multiplier
Money Supply= 520*2.1155
Money Supply = 1100.06
b) When Central Bank does open market purchase securities are transferred from banks to central bank in return Central bank injects, thereby increasing monetary base through increase in reserves.
New Monetary Base = 520 + 800
New Monetary Base = 1320
New Money Supply=Monetary Base * Money Multiplier
New Money Supply= 1320 * 2.1155
New Money Supply= 2792.46
Hence, money supply will increase.
