In Econland, the monetary base is $1,000. People hold one-third of their money in the form of currency and two-thirds as bank deposits. Banks hold one-fourth of their deposits in reserves. a. What are the currency-deposit ration, the reserve-deposit ratio, the money multiplier, and the money supply? Show your calculation. b. One day, fear about the banking system strikes the population, and people now want to hold half of their money in the form of currency. If the central bank does nothing, what is the new money multiplier and the money supply? What happens to the money supply? c. Suppose instead of doing nothing, the central bank decides to conduct an open-market operation to keep the money supply at its original level, does it buy or sell government bonds? How much does the central bank needs to buy or sell? Show your calculation.

In Econland, the monetary base is $1,000. People hold one-third of their money in the form of currency and two-thirds as bank deposits. Banks hold one-fourth of their deposits in reserves. a. What are the currency-deposit ration, the reserve-deposit ratio, the money multiplier, and the money supply? Show your calculation. b. One day, fear about the banking system strikes the population, and people now want to hold half of their money in the form of currency. If the central bank does nothing, what is the new money multiplier and the money supply? What happens to the money supply? c. Suppose instead of doing nothing, the central bank decides to conduct an open-market operation to keep the money supply at its original level, does it buy or sell government bonds? How much does the central bank needs to buy or sell? Show your calculation.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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