8. Consider a hypothetical economy with a nominal GDP of $1.2 trillion, real GDP of$600 billion, and money supply of $60 billion. Suppose commercial banks are requiredto maintain a reserve requirement of 10% of deposits. Assume that banks do not holdexcess reserves.a) Calculate the money multiplier for this economy. If the central bank buys $1billion of government bonds, what is the effect on money supply? Show yourwork.b) Using the quantity theory of money, calculate the price level and the velocityof money for this economy prior to central bank action. Show your work.c) Assume that velocity is constant and real GDP increases by 2% each year.What will happen to nominal GDP and the price level next year if moneysupply does not change? Show your work.d) In (c), what money supply should the central bank set next year to keep theprice level unchanged? Show your work.e) In (c), what money supply should the central bank set next year if it wantsinflation of 5%? Show your work.

Lets solve each part of the problem step- by - step : Part (a) Calculate the money multiplier and…

Answered: 8. Consider a hypothetical economy with…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Banks in New Transylvania have a desired reserve ratio of 10 percent of deposits and no excess reserves. The currency drain ratio is 50 percent of deposits. Now suppose that the central bank increases the monetary base by $900 billion. How much of the initial amount loaned does not return to the banks but is held as currency? Why does a second round of lending occur? Calculate money multiplier in this example? What is the final increase in the quantity of money? Give typing answer with explanation and conclusion
Economics Total reserves: $80 billion Transactions deposits: $700 billion Cash held by public: $300 billion Reserve requirement: 0.1 E) How large would the money supply be if the banks fully utilized their lending capacity? The money supply will fall to/ rise to $ __ billion F) What three steps could the fed take to offset that potential growth in M1? Raise the discount rate, raise the reserve requirement, and buy bonds in the open market Lower the discount rate, lower the reserve requirement, and buy bonds in the open market Raise the discount rate, raise the reserve requirement, and sell bonds in the open market Raise the federal funds rate, lower the reserve requirement, and sell bonds in the open market
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 $500. 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) 5 10 A lower 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 due to uncertain economic conditions.…
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Explain what a $5 billion increase in bank reserves will do to real GDP under the following assumptions: a.Each $1 billion increase in bank reserves reduces the rate of interest by 0.5 percentage point. b. Each 1 percentage point decline in interest rates stimulates $30 billion worth of new investment. c. The expenditure multiplier is two. d. The aggregate supply curve is so flat that prices do not rise noticeably when demand increases
1. The growth rate of the money supply in a particular year was 8.5%. What was the growth rate of real GDP if the inflation rate in the same year was 4%? 2. During a recession, the Fed enacts countercyclical policy, by changing the quantity of reserves. To fight recession, how will the Fed adjust the quantity of reserves in the market (to S₁ or S₂)? Explain how the Fed can operationalize that. Fed funds rate () S I 1 I I 1 T I 1 1 1 1 I || I I 1 1 1 1 So I I 1 1 I 1 I I 1 1 I 1 1 J I I 1 1 + I I I I 2 D Quantity of reserves 3. Explain why the zero lower bound is a problem for monetary policy. If there's a recession and the Central Bank is at a zero lower bound, what monetary policies can it pursue to stimulate the economy?
Macmillan Learning Suppose you win on a scratch-off lottery ticket and you decide to put all of your $2,500 winnings in the bank. The reserve requirement is 10%. What is the maximum possible increase in the money supply as a result of your bank deposit? maximum increase: S 24750 Incorrect Which events could cause the increase in the money supply to be less than its potential? All money loaned out is deposited back into the banking system. Banks decide to keep some excess reserves on hand. Banks choose to loan out all excess reserves. Some loan recipients choose to hold some cash instead of depositing all of it in banks.
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Suppose the Federal Reserve increases the amount of reserves by $150 million and the total money supply increases by $600 million. Instructions: Enter your answers as a whole number. a. What is the money multiplier? b. Using the money multiplier from part a, how much will the money supply change if the Federal Reserve increases reserves by $40 million? $ million
Question 2 is attatched. Asking for an answer for question 4
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8. The reserve requirement, open market operations, and the moneysupply Consider a system of banking in which the Federal Reserve uses required reserves to control the money supply (as was the case in the United States before 2008). Assume that banks do not hold excess reserves and that households do not hold currency, so the only money exists in the form of demand deposits. To further simplify, assume the banking system has total reserves of $100. Determine the money multiplier as well as the money supply for each reserve requirement listed in the following table. Reserve Requirement (Percent) 15 10 Simple Money Multiplier A lower reserve requirement is associated with a Money Supply ollars) money supply. Suppose the Federal Reserve wants to increase the money supply by $100. Maintain the assumption 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…

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