1- Suppose that the required reserve ratio is 10%, currency in circulation is $400 billion, the amount of checkable

Question

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)

Help In Homework · Accepted Answer

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.

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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

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