Economics:
10th Edition
ISBN: 9781285859460
Author: BOYES, William
Publisher: Cengage Learning
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Question
Chapter 12, Problem 13E
To determine
(a)
To compute:
The deposit expansion multiplier if there is no cash drain.
To determine
(b)
To compute:
The value of deposit expansion multiplier if there is a cash drain of
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A. If the Tax Multiplier is -7, what is the Government Spending Multiplier? Show work.
B. The Required Reserve Ratio of Denmark is 2%. What is the Money Multiplier? Show work.
C. Suppose the National Bank of Denmark doubles the Required Reserve Ratio to 4%, what would be the new Money Multiplier? Compare your answer in part (d) to your answer in part (c), what do you conclude about the relationship between the Required Reserve Ratio and the Total Money Supply in the economy?
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A Federal Reserve publication notes that when economists analyze the money supply process, they typically assume that the money multiplier is "independent of the policy actions of the
central bank."
Briefly explain what this assumption means?
○ A. The money multiplier has nothing to do with the money supply.
B. The money multiplier is determined by a variety of factors over which the central bank has no control.
C. The money multiplier is not affected by central bank actions.
OD. The Fed rarely changes the money multiplier so economists typically assume that it will remain constant.
Assume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is demand deposits. To simplify the analysis, suppose the banking system has total reserves of $300. Determine the money multiplier and the money supply for each reserve requirement listed in the following table.
A higher reserve requirement is associated with a __larger, smaller__money supply.Suppose the Federal Reserve wants to increase the money supply by $200. Again, you can assume that banks do not hold excess reserves and that households do not hold currency. If the reserve requirement is 10%, the Fed will use open-market operations to ____buy / sell_$___________worth of U.S. government bonds.
Now, suppose that, rather than immediately lending out all excess reserves, banks begin holding some excess reserves due to uncertain economic conditions. Specifically, banks increase the percentage of deposits held as reserves from 10% to 25%. This increase in the reserve…
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- Some individuals have suggested raising the required reserve ratio for banks to 100 percent in a limited reserve banking system. a. What would the money multiplier be if this change was made? Assume people hold no cash. Instructions: Enter your response as a whole number. b. What effect would such a change have on the money supply? The money supply would decrease c. How could that effect be offset? By a decrease in government spending By an increase in government spending By an increase in taxesarrow_forwardSuppose that Rina makes a new cash deposit of $85,000 at her bank. Suppose that the bank is required only to keep new cash reserves equal to 25%. Then the maximum amount Rina's deposit will money supply is $ increase the decrease Which of the following assumptions must hold to ensure that the money creation process initiated by Rina's deposit reaches its potential? Check all that apply. Some borrowers cash the newly acquired funds. At least one bank in the banking system is conservative enough to keep some of its newly acquired cash deposits in its vault. All borrowers quickly spend all of their newly acquired funds. All banks in the banking system lend all of their excess reserves.arrow_forward1 a) Calculate the money multiplier. b) Calculate the bank deposit multiplier.arrow_forward
- Question 2 If reserves increase, banks have the ability to make more loans, which as we have seen would increase the money supply. Suppose the Fed uses open market operations to add $1 million in reserves to the banking system, and all banks keep a ratio of reserves to deposits of 20%. Then according to the money multiplier formula, by how much will the money supply ultimately increase? (Answer in millions, to the nearest .1 million if your answer is not an integer.) Your Answer: Answer D View hint for Question 2 Question 3 (. Chapter 11 mentions that in the past the Fed did not pay interest on accounts that banks kept with it, but that since 2008 it has paid interest on these accounts. Does the Fed paying interest have any effect on the ratio of reserves to deposits that banks choose to hold? Does it increase the reserve ratio, decrease it, or have no effect on it? Explain briefly. (Graded for participation only.)arrow_forwardWhat are the two assumptions used to calculate the money multiplier?arrow_forwardAssume that a bank receives a deposit of $1,000 in cash, puts aside $200 as required reserves, and makes a loan of $800, these transactions imply that: A) the money multiplier is 10. B) the money multiplier is 5. C) the money multiplier is 4.arrow_forward
- The Fed wants to change the reserve requirement in order to change the money supply (MS and MM currently is $3,000 and 3 respectively). For each situation below, calculate the current reserve requirement and the amount by which the Fed must change the reserve requirement to achieve the desired change in the money supply. Assume no cash holdings. a. Money multiplier is 3 and the Fed wants to increase money supply by $300. b. Money multiplier is 2.5 and the Fed wants to increase the money supply by $300. c. Money multiplier is 4 and the Fed wants to decrease the money supply by $500. d. Money multiplier is 4 and the Fed wants to increase the money supply by $1,000.arrow_forwardExplanation it correctly Q)Assume that some people who receive bank loans do not deposit the full amount of the loan into a bank. This will cause the money multiplier to be the bank deposits multiplier. A) smaller than B) greater than C) neither greater than or smaller than D) the same asarrow_forwardAssume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is checkable deposits. To simplify the analysis, suppose the banking system has total reserves of $400. Determine the money multiplier and the money supply for each reserve requirement listed in the following table. Reserve Requirement Money Multiplier Money Supply (Percent) (Dollars) 20 10 A higher reserve requirement is associated with a money supply. Suppose the Federal Reserve wants to increase the money supply by $200. Again, you can assume that banks do not hold excess reserves and that households do not hold currency. If the reserve requirement is 10%, the Fed will use open-market operations to worth of U.S. government bonds. Now, suppose that, rather than immediately lending out all excess reserves, banks begin holding some excess reserves in response to uncertain economic conditions.…arrow_forward
- 2. Consider the following: B= 1,000 (billion) cr=0.6 TT= 0.15 a. What is the money multiplier, m? b. With this money multiplier, what would the money supply be if the monetary base was 1,000 (billion)? c. Imagine if cr increased to 0.8. What does this mean, in words? How would the money multiplier be affected (if at all)? What about the money supply?arrow_forwardAssume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is demand deposits. To simplify the analysis, suppose the banking system has total reserves of $100. Determine the money multiplier and the money supply for each reserve requirement listed in the following table. Reserve Requirement Simple Money Multiplier Money Supply (Percent) (Dollars) 25 10 A lower reserve requirement is associated with a money supply. Suppose the Federal Reserve wants to increase the money supply by $100. Again, you can assume that banks do not hold excess reserves and that households do not hold currency. If the reserve requirement is 10%, the Fed will use open-market operations to worth of U.S. government bonds. Now, suppose that, rather than immediately lending out all excess reserves, banks begin holding some excess reserves due to uncertain economic conditions.…arrow_forwardCalculate the value of the money multiplier in each of the following situations: Banks hold no excess reserves, the required reserve ratio is 100%, and households and firms hold currency and deposits in equal amounts. The value of the money multiplier is 1. (Enter your response as a whole number.) The required reserve ratio is 0, banks hold reserves equal to the value of their deposits, and households and firms hold half as much in currency as in deposits. The value of the money multiplier is 1. (Enter your response as a whole number.) The required reserve ratio is 0, households and firms hold three times as much in currency as in deposits, and banks hold reserves equal to three-quarters the value of their deposits. The value of the money multiplier is 1.07. (Round your response to two decimal places.)arrow_forward
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