Introduction Assume that these are the most recent U.S. data on key monetary var

Question

Introduction
Assume that these are the most recent U.S. data on key monetary variables (B stands for billions of dollars):

2a. Calculate the money multiplier.

2b. Now, assume the Fed buys $1B worth of T-Bonds.
Will the money supply increase or decrease? Explain.

2c. Assuming no change in E (the percentage of deposits that banks want to hold as excess reserves), and no change in cash held by the public, what will be the final U.S.money supply after the Fed’s action? Show all of your calculations.

Cash held by the public $1B Checking deposits $9B Reserve Requirement 10% Excess reserves 10%

Explanation / Answer

a Money Multiplier = 1/Reserve Requirement
Money Multipllier = 1/10% = 10

b. Money Supply will increase as it increases the reserve. The buying of $1B worth of T- bonds does not have any monetary Impact.
Before Buying T- Bonds

After Buying TBonds

Reserves 40 Deposits 90 Loans 20 Capital 10 T Bonds 40 Total 100 100

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