Consider the following information about the banking system: Reserves = $500 bil

ID: 1106281 • Letter: C

Question

Consider the following information about the banking system:

Reserves = $500 billion

Currency = $400 billion

Required Reserves = $80 billion

Reserve Ratio = 10%

A) What is the value of deposits in the banking system?

B) What is the value of the money supply?

C) What is the value of the money multiplier?

D) If the Fed wishes to have the value of the money supply in the economy at the initial level ($5.4 trillion), how should it respond? Explain.

E) How much in government bonds should the Fed sell or buy?

A) Reserves = checkable deposits * required reserve ratio

Checkable deposits = reserves / required reserve ratio

Checkable deposits = $500 billion / 0.1 = $ 5000 billion

B) . Money supply = Deposits + Currency = $ 5,000 billion + $ 400 billion = $ 5,400 billion

C) Money multiplier = Money Supply / Monetary Base = $ 5,400 billion / $ 900 billion = $ 6 billion

D) the price level will decrease.

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