Suppose that the required reserve ratio is 9%, currency in circulation is $620 b

Question

Suppose that the required reserve ratio is 9%, currency in circulation is $620 billion, the amount of checkable deposits is $920 billion, and excess reserves are $14 billion.

The money supply is $1540 billion.

The currency deposit ratio is . 674

The excess reserves ratio is . 015 The money multiplier is 2.15

Suppose the central bank conducts an unusually large open market purchase of bonds held by banks of $1,500 billion due to a sharp contraction in the economy. Assuming the ratios you calculated in the previous steps are the same, the money supply should decrease increase to $ billion. (Round your response to the nearest whole number.)

Explanation / Answer

MS = Currency in circulation + Checkable deposits = 620 + 920 = $1540 Billion

currency deposit ratio(C) = Currency in Circulation/ Checkable deposits = 620/920 = 0 .674

ERR = Excess Reserves/Checkable deposits = 14/920 = 0.015

RR Ratio = Required reserves/ Checkable deposits = 0.09

Multiplier = (1 + C)/(RR + ER + C) = (1 + 0.674) / (0.09 + 0.015 + 0.674) = 2.15

Suppose the central bank conducts an unusually large open market purchase of bonds held by banks of ?$1,500 billion due to a sharp contraction in the economy.

The monetary base will increase to $620 + $82.8+ $14 + $1500 = $2216.8 billion

Given the money multiplier as 2.15, this implies the money supply should increase to $2216.8 × 2.15 = $4677 billion

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

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