B. Will this increase the monetary base by $10 million, more than $10 million, or less than $10million?C. Will this increase the money supply by $10 million, more than $10 million, or less than $10million? Why?D. Suppose that, when people receive $100, they choose to hold $20 as cash and $80 asdeposits. Also, banks want to hold 5% of deposits as reserves. Calculate the money multiplier,and the increase in the money supply from the Fed's action.E. What happens in the money market in the short run? (Draw a graph, but also explain inwords.)F. What happens in the money market in the long run? 2. Suppose the Fed does an open market purchase of $10 million worth of securities from TDBank. Their assets & liabilities before the purchase are shown below (in millions of dollars):The FedTD BankAssetsLiabilitiesAssetsLiabilities900 (securities)5,000 (currency)30 (TD's reserve. acc.)700 (securities)30 (res. acc. at Fed)550 (deposits)A. How does this affect the Fed's assets & liabilities? How does this affect TD's assets &liabilities? (Use the following table. If you do your work on loose-leaf, just copy the table byhand.)The FedTD BankAssetsLiabilitiesAssetsLiabilities(securities)(currency)(securities)(deposits)(TD's reserve acc.)(reserve acc. at Fed)

The Open Market Operation is one of the quantitative instruments of the monetary policy of the…

B. Will this increase the monetary base by $10 million, more than $10 million, or less than $10 million? C. Will this increase the money supply by $10 million, more than $10 million, or less than $10 million? Why? D. Suppose that, when people receive $100, they choose to hold $20 as cash and $80 as deposits. Also, banks want to hold 5% of deposits as reserves. Calculate the money multiplier, and the increase in the money supply from the Fed's action. E. What happens in the money market in the short run? (Draw a graph, but also explain in words.) F. What happens in the money market in the long run?

B. Will this increase the monetary base by $10 million, more than $10 million, or less than $10 million? C. Will this increase the money supply by $10 million, more than $10 million, or less than $10 million? Why? D. Suppose that, when people receive $100, they choose to hold $20 as cash and $80 as deposits. Also, banks want to hold 5% of deposits as reserves. Calculate the money multiplier, and the increase in the money supply from the Fed's action. E. What happens in the money market in the short run? (Draw a graph, but also explain in words.) F. What happens in the money market in the long run?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Assume that the banking system has total reserves of $200 billion. Additionally, assume that the Federal Reserve mandates that required reserves are 25% of checking deposits. Banks may not hold excess reserve and households have no currency. What is the money supply? Select one: a. $600 billion b. $450 billion c. $800 billion d. $300 billion
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 required to maintain a reserve requirement of 10% of deposits. Assume that banks do not hold excess reserves. a) Calculate the money multiplier for this economy. If the central bank buys $1 billion of government bonds, what is the effect on money supply? Show your work. b) Using the quantity theory of money, calculate the price level and the velocity of 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 money supply does not change? Show your work. d) In (c), what money supply should the central bank set next year to keep the price level unchanged? Show your work. e) In (c), what money supply should the central bank set next year if it wants inflation of 5%? Show your…
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