8. (Mishkin 17.25) Suppose that currency in circulation is $600 billion, the amo

Question

8. (Mishkin 17.25) Suppose that currency in circulation is $600 billion, the amount of checkable deposits is $900 billion, and excess reserves are $15 billion. Assume that the required 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 of 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 1 for most of the time from October 2008 through 2011. How does this scenario relate to your answer to part (c)? 9. (Mishkin 18.2) During the holiday season, when the public's holdings of currency increase what defensive open market operations typically occur? Why?

Explanation / Answer

9) When the public’s holding of currency increases, the money multiplier decreases (the currency–checkable deposits ratio increases and the money supply falls). To counter this decline in the money supply, the Fed will conduct an open market purchase.

Related Questions

Navigate

• Browse (All)
• Browse 8
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.