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 31, Problem 4TY
(a)
To determine
Explain the size of M.
(b)
To determine
Explain the monetary base and the size of M.
(c)
To determine
Explain the relationship between M and B.
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Consider a banking system where the Federal Reserve uses required reserves to control the money supply. (This was the case in the U.S. prior to
2008.) 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
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Suppose the money supply (as measured by checkable deposits) is currently $300 billion. The required reserve ratio is 25%. Banks hold $75 billion in reserves, so there are no excess reserves.
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If the Fed wants to decrease the money supply by adjusting the required reserve ratio, it should ______(increase/decrease) the required reserve ratio.
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BUSN5 CH2 WKSMultiple ChoiceIdentify the choice that best completes the statement or answers the question.1. Define economics.a) a financial and social systemb) the study of a countryâs overall economic issuesc) the integration between consumers, families, and businessesd) the study of the choices that different entities make in allocating resources2. Macroeconomics focuses ona) the major issues facing the national economy, but has little or no relevance to individuals.b) smaller economic units such as individual consumers, families, and individual businesses operating within the economy.c) the major issues facing the national economy that may seem abstract, but directly affect an individualâs day-to-day life. d) the role of government, while microeconomics focuses on the private sector.3. After the collapse of the dot com bubble and the 9/11 terrorist attacks, the stock market depreciated and unemployment increased leading many to fear that the…
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- The following diagram shows the Money Market for a hypothetical economy. Suppose that the economy begins with a Money Supply (Ms) of $300 million, and an equilibrium interest rate of 5.0%. Finally suppose that the required reserve ratio (rr) is 15%. Use the scenario to answer Questions 10 to 13. Interest rates (i) 5.5% 5% 4.5% Ms O increase the money supply $10 million O increase the money supply $100 million O decrease the money supply $300 million O decrease the money supply $200 million O decrease the money supply $100 million $200 $300 $350 Mp Quantity of Money (millions) Suppose that the Central Bank wished to raise the equilibrium interest rate up to 5.5%. In order to achieve this, it would need I toarrow_forwardQuestion 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_forwardSuppose that the reserve requirement for checking deposits is 16 percent and that banks do not hold any excess reserves. If the Fed sells $2 million of government bonds, the economy's reserves (either increase or decrease) by $______million, and the money supply will (increase or decrease) by $______million. Now suppose the Fed lowers the reserve requirement to 8 percent, but banks choose to hold another 8 percent of deposits as excess reserves. True or False: The money multiplier will increase. False True or False: As a result, the overall change in the money supply will increase. Truearrow_forward
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