2. Here is the balance sheet of the consolidated banking system of the country of Zargadee (all entries are in millions): Consolidated Balance Sheet of the Entire Economy of Zargadee Bonds Loans Assets Reserves Cash in Vault Deposits at CBZ 50 90 Total Reserves Total Assets 140 460 1000 Liabilities 1600 Deposits Borrowing from CBZ Total Liabilities Assume that 1) households hold no currency and 2) banks hold no excess reserves. The current reserve requirement is 10%. 1400 200 1600 The Central Bank of Zargadee (CBZ) uses the three traditional tools to perform monetary policy in an economy that is reserve constrained. a. Under our assumptions, what is the money multiplier? For each part (b)-(d) below, i) Conceptually explain the effect of the policy on the money supply. ii) Calculate the change in M1 given our assumptions. iii) Construct the new balance sheet of the consolidated banking system of Zargadee under the new policy. iv) When the money supply changes, list a chain of events to make a prediction using the Aggregate Demand / Aggregate Supply framework about the change in real output in the short vi) the long run effect on the price level and real output and vii) the total effect of the policy on the price level and real output. run. Then, using the Aggregate Demand / Aggregate Supply framework (use a graph), determine v) the short run effect on the price level and real output and b. The central bank decreases the reserve requirement to 5%. c. The central bank performs an open market operation and buys $10 million in bonds. d. The central bank performs an open market operation and sells $10 million in bonds.
2. Here is the balance sheet of the consolidated banking system of the country of Zargadee (all entries are in millions): Consolidated Balance Sheet of the Entire Economy of Zargadee Bonds Loans Assets Reserves Cash in Vault Deposits at CBZ 50 90 Total Reserves Total Assets 140 460 1000 Liabilities 1600 Deposits Borrowing from CBZ Total Liabilities Assume that 1) households hold no currency and 2) banks hold no excess reserves. The current reserve requirement is 10%. 1400 200 1600 The Central Bank of Zargadee (CBZ) uses the three traditional tools to perform monetary policy in an economy that is reserve constrained. a. Under our assumptions, what is the money multiplier? For each part (b)-(d) below, i) Conceptually explain the effect of the policy on the money supply. ii) Calculate the change in M1 given our assumptions. iii) Construct the new balance sheet of the consolidated banking system of Zargadee under the new policy. iv) When the money supply changes, list a chain of events to make a prediction using the Aggregate Demand / Aggregate Supply framework about the change in real output in the short vi) the long run effect on the price level and real output and vii) the total effect of the policy on the price level and real output. run. Then, using the Aggregate Demand / Aggregate Supply framework (use a graph), determine v) the short run effect on the price level and real output and b. The central bank decreases the reserve requirement to 5%. c. The central bank performs an open market operation and buys $10 million in bonds. d. The central bank performs an open market operation and sells $10 million in bonds.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:2. Here is the balance sheet of the consolidated banking system of the country of Zargadee (all
entries are in millions):
Consolidated Balance Sheet of the Entire Economy of Zargadee
Assets
Reserves
Cash in Vault
Deposits at CBZ
Bonds
Loans
50
90
Total Reserves
Total Assets
140
460
1000
1600
Liabilities
Deposits
Borrowing from CBZ
Total Liabilities
1400
200
1600
Assume that 1) households hold no currency and 2) banks hold no excess reserves.
The current reserve requirement is 10%.
The Central Bank of Zargadee (CBZ) uses the three traditional tools to perform monetary policy
in an economy that is reserve constrained.
a. Under our assumptions, what is the money multiplier?
For each part (b)-(d) below,
i) Conceptually explain the effect of the policy on the money supply.
ii) Calculate the change in M1 given our assumptions.
iii) Construct the new balance sheet of the consolidated banking system of Zargadee
under the new policy.
iv) When the money supply changes, list a chain of events to make a prediction using the
Aggregate Demand / Aggregate Supply framework about the change in real output in the short
run.
Then, using the Aggregate Demand / Aggregate Supply framework (use a graph), determine
v) the short run effect on the price level and real output and
vi) the long run effect on the price level and real output and
vii) the total effect of the policy on the price level and real output.
b. The central bank decreases the reserve requirement to 5%.
c. The central bank performs an open market operation and buys $10 million in bonds.
d. The central bank performs an open market operation and sells $10 million in bonds.
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