Economics: Principles & Policy
14th Edition
ISBN: 9781337696326
Author: William J. Baumol; Alan S. Blinder; John L. Solow
Publisher: Cengage Learning
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Question
Chapter 29, Problem 5TY
To determine
The effect of a $5 billion increase in bank reserves on different assumptions.
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Which of the following assumptions is necessary for the money multiplier (m) to be used in the equation D=E×m
(where D stands for the maximum checkable-deposit creation and E is the initial change in excess reserves)?
A. People's marginal propensity to consume does not rise with income.
B. Borrowers use the entire loan amount to pay others, who will deposit all of the funds in a checking account.
C. Borrower default rates are stable.
Suppose Cindy purchases a meal at a local Baton Rouge restaurant and pays with her debit card. Everything else held constant, this purchase will cause the money multiplier to _____ and the money supply to _____.
Select one:
A. remain unchanged; increase
B. remain unchanged; remain unchanged
C. remain unchanged; decrease
D. increase; increase
E. decrease; decrease
F. decrease; increase
G. increase; decrease
If the above assumption did not hold, the change in the money supply would be ________(less /greater) than you found because:
1. If banks held excess reserves, they would make fewer loans than they otherwise would.
2. The multiplier holds only as long as the required reserve ratio is between 5% and 10%.
3. Banks would make fewer loans than they would if they could perfectly observe borrowers' true creditworthiness.
Chapter 29 Solutions
Economics: Principles & Policy
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- If the money multiplier is determined to have a value of 5 and the Fed wants to increase the money supply by $10 billion, then it must cause the monetary base to _____ by _____. a. increase....10 billion b. increase... 2 billion c. decrease....10 billion d. decrease....2 billion e. increase...5 billion f. decrease....5 billionarrow_forwardHow do changes in interest rates impact consumer spending, business investment, and overall economic activity, and how does the central bank use interest rates as a tool of monetary policy? A) Changes in interest rates have no effect on economic activity. B) Lower interest rates typically encourage consumer borrowing and business investment, stimulating economic activity. The central bank uses interest rate adjustments as a tool to influence borrowing and spending. C) Higher interest rates boost economic activity by increasing consumer savings. D) Changes in interest rates only affect government spending.arrow_forwardSuppose that this year's money supply is $1,200 billion, nominal GDP is $6,000 billion and real GDP is $5,000 billion. (This question concerns the Equation of Exchange in the Classical Quantity Theory of Money). a) What is the price level (expressed as a percentage-i.e., as a price index)? b) What is the velocity of money? c) Suppose that velocity is constant and the economy's output of goods and services rises by 6 percent each year. If the Fed keeps the money supply constant, what will nominal GDP be next year? d) Under the conditions in c) what will happen to the price level next year? e) What money supply should the Fed set next year if it wants to keep the price level stable? 1) What money supply should the Fed set next year if it wants the inflation rate to be 8 percent?arrow_forward
- A hypothetical economy is having currency in circulation of $100m, and deposits of $400m. Assume that required reserves are $40m and excess reserves are 60m a) Calculate the monetary base. How much is the money supply? b) Calculate the effect on the money supply of a decrease of currency in circulation by $40m c) What would the central bank do to offset the effects of the decrease in the currency in circulation by $40m?arrow_forwardWhich of the following describes the chain of events the Central bank uses to fight recession? A. Raise the monetary policy rate target, sell government securities, decrease reserves and loans, increase aggregate demand.B. Raise the monetary policy rate target, buy government securities, increase reserves and loans, decrease aggregate demand.C. Lower the monetary policy rate target, buy government securities, decrease reserves and loans, decrease aggregate demand.D. Lower the monetary policy rate target, buy government securities, increase reserves and loans, increase aggregate demand.arrow_forwardLet us pretend that you are the director of monetary affairs for the Fed and you just got authority to pay interest on excess reserves. The initial conditions in the reserve and money markets, before the authority was granted are as follows: rr = .10 C = 200 D = 4000 ER = 00 a) Show all of your work. i) Calculate the MB. ii) Calculate the money multiplier. iii) What is the money supply (use mm x MB to calculate this)? b) If Rd= 407.5 – 50 iff,given the information above, what is the market clearing federal funds rate? Show all of your work Draw a reserve market diagram depicting exactly what is going on here! Label this initial equilibrium point as point A. (10 points for correct and completely labeled diagram) c) So you get this authority and decide, along with the FOMC, that the most appropriate rate to pay on excess reserves would be 20 basis points (0.20%). Given these new conditions, explain what would happen reserve demand and why. You don't need to derive an…arrow_forward
- 24. If the economy is at potential output, and the Fed increases the money supply, in the short run, the likely result will be a(n) _____ in investment and a(n) _____ in consumer spending. increase; decrease decrease; increase increase; increase decrease; decrease 26. Suppose that a typical basket of goods is now less expensive than it used to be. All else equal, we would expect: the demand curve for money to shift outward. a downward movement along a fixed money demand curve. the demand curve for money to shift inward. an upward movement along a fixed money demand curve.arrow_forwardUse the following table to answer the next question. The money supply and investment are in billions. Money Supply (billions of dollars) A) buy, $2 billion B) sell, $4 billion OC) sell, $2 billion Interest Rate $50 7% $100 60 6 110 70 5 120 80 4 130 90 3 140 Assume that the MPC is 0.8 and the reserve requirement is 0.1. If the Federal Reserve needs to increase aggregate demand by $100 billion at each price level to move the economy back to full employment and the current interest rate is 7%, then the Federal Reserve should ______ bonds on the open market equal to D) buy, $4 billion Investment (billions of dollars)arrow_forwardSuppose that the Price level = 120, Supply of Money = $20 billion, and Real GDP = $4 billion. If the velocity of the money stays the same but Real GDP increases by 5%, what will happen to the price level if the supply of money increases by $5 billion? Select one: a. It will increase to 142.9 b. It will increase to 135.4 c. It will increase to 128.5 d. It will increase to 122.5 e. It will stay 120. These changes are offsettingarrow_forward
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