L. Assume the reserve ntio-125% or 1/S and all the banks are mitially alr lent u

Question

L. Assume the reserve ntio-125% or 1/S and all the banks are mitially alr lent upue their Excess Reserves-optaukle following, ifthe "FED SELIsSI biallion worth of US Goverament bonds to a bond dealer, who is a Bank "A" depositor (Gi.e the bond dealer has a checking account balance at Bank A) and the bond dealers PAYs the "FED" for the bonds with a check a The change in the marion ' S MOney upely cansed by the "FED" sales of bonds to the bond dealer alone after the check clears answer: minus Lillion ne.The Nation's AMoney Saupply has decreased by 31 billionwhen the bond dealer's account balance goes down)fremember when the "FED" has the bond dlealers checked cleared a te bond dealer's checking account balance goes down by SI billion the Banl's dleposit at the "HED goes down by SI biltion h. Eacess Reserves of Bank - (the bond dealer's bank), after boud dealer's check is cleared by the FED Hint: Bank"A" will lose $1 billion in Reserve Assets when the bond dealer's account balance goes down by SI billion) minimum change in the mation's moncy sapphy that will be cased by Bank "A( the bond dealers' bank), as it (Bank A) sells interest earning assets to households, firms or goveraments and wses their checks to get reserves from their banks, say Bank B Hint: Households, firms or governments are paying Bank A" with checks to buy those interest earning assets) governments and uses their checks to get reserves from their banks, say Bank C- repeated until all the banks get their excess reserves to equal - d. minimum change in the mation 's moncysaply cnsed byasecond (bank B) as it sells securities to households, firms or e minimum change in the nation'smncy sppl caused by all the banks in the banking system summed up, as this process is 2. Assume GIVEN basket ofproducts costs S5 million in the Base Year and the following is true in 2015. ( the same basket of products costs $7.5 million in 2015, b. GDPams- $18 trilliong c. money wageses or Waes- $90,000/year; d. the price of gasns $3.60gallon; and d. the Money Supply20us-S 1.8 trillion). Now determine the following (a-) and g lainthenumber(two parts to questions 2a-2e) a. Price Index zens answer(Ps-1.3 b.real GDP 2s explanation: this number means ereal wa explanation: this number means 2015 or wms d.real price of gas us explanatiom: this number means ereal moncy supplyzos real balancesses- explanation: this number means r. Price Index for 2016, if the inflation rate is 2% from 2015 to 2016 . 3 Define the variables in the following equation (M times V)-GDP-y times P) (use a concise phrase to define each) a. M is an abbreviation for the b. Vis an abbreviation for the: answer; income Velocity of Money (the member of times amally the money sl circulates purchasin e. GDP is an abbreviation for the: d. Q or y is an abbreviation for Aggregate e. Ph is an abbreviation for the Price level the dollar pricess of all the currendly prouced proects and is measwred by the Price Index C. The Inflation gatc is defined as the t The Deflation rate is defined as the:

Explanation / Answer

1. a) The answer is given in question

b) The change in excess reserve will be $1 billion - 12.5% of $1 billion = $875 million

c) Now from bank A, the change in nation's money supply will be the amount that it was able to loan or transact with bank B i.e. minus $875 million.

d) Now from bank B, the change in nation's money supply will be the amount that it was able to loan or transact with bank C i.e. $875 million - 12.5% of $875 million = minum $765,625,000

e) Total change in money supply will be as per the money multiplier which is 1/RR so total change is -$1billion/0.125=-$8billion..

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