Answered: The central bank buys $10,000 worth of…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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The central bank buys $10,000 worth of bonds in the open market from Elaine, who deposits the proceeds in her checking account at MSM Bank. The required reserve ratio is 5%.

(a) What is the amount by which MSM Bank’s liabilities have changed? Explain.

(b) Calculate the change in required reserves for MSM Bank. Show your work.

(c) What is the dollar value of the maximum amount of new loans MSM Bank can initially make as a result of Elaine’s deposit? Explain.

(d) Based on the central bank’s open-market purchase of bonds, calculate the maximum amount by which the money supply can change throughout the banking system. Show your work.

(e) How will the change in the money supply in part (d) affect aggregate demand and the price level in the short run? Explain.

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Question 26
Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly
labeled diagram must have all axes and curves clearly labeled and must show directional changes.
If the question prompts you to "Calculate," you must show how you arrived at your final answer.
The central bank buys $10,000 worth of bonds in the open market from Elaine, who deposits the
proceeds in her checking account at MSM Bank. The required reserve ratio is 5%.
(a) What is the amount by which MSM Bank's liabilities have changed? Explain.
(b) Calculate the change in required reserves for MSM Bank. Show your work.
(c) What is the dollar value of the maximum amount of new loans MSM Bank can initially make as a
result of Elaine's deposit? Explain.
(d) Based on the central bank's open-market purchase of bonds, calculate the maximum amount by
which the money supply can change throughout the banking system. Show your work.
(e) How will the change in the money supply in part (d) affect aggregate demand and the price level
in the short run? Explain.

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