Module 5: Monetary Instability: For all questions assume the following starting point: The money supply (M) is composed of currency (C) held by the non-bank private sector (NBPS) and demand deposits (DD) held at banks. Banks are required to hold cash reserves (CR) equal to 10% of their demand deposit liabilities. The remainder of the bank’s DD liabilities is backed by loans (L). Initially, banks have 2000 in cash reserves and the NBPS holds 500 in currency. Currently, banks not hold excess reserves. a. What are the initial values for DD, L, and M? DD= $20,000 L= $18,000 M= $5,000 b. What happens to the values in part a, if the NBPS decides to hold an additional 200 in currency? DD = 20,000, L = 18,000, M = 20,700 c. What would happen to the values in part a if banks decided to hold 2.5% excess reserves? DD = 20,000, L = 17,500, M = 20,500 d. What happens to the values in part a if concerns about the economy's future caused both b and c to happen? DD = 20,000, L = 17,500, M = 20,700 e. Given the result in part-d, what open market operation would you use to keep the money supply at the level in the part of Module 5?
Module 5: Monetary Instability: For all questions assume the following starting point: The money supply (M) is composed of currency (C) held by the non-bank private sector (NBPS) and demand deposits (DD) held at banks. Banks are required to hold cash reserves (CR) equal to 10% of their demand deposit liabilities. The remainder of the bank’s DD liabilities is backed by loans (L). Initially, banks have 2000 in cash reserves and the NBPS holds 500 in currency. Currently, banks not hold
a. What are the initial values for DD, L, and M?
DD= $20,000 L= $18,000 M= $5,000
b. What happens to the values in part a, if the NBPS decides to hold an additional 200 in currency?
DD = 20,000, L = 18,000, M = 20,700
c. What would happen to the values in part a if banks decided to hold 2.5% excess reserves?
DD = 20,000, L = 17,500, M = 20,500
d. What happens to the values in part a if concerns about the economy's future caused both b and c to happen?
DD = 20,000, L = 17,500, M = 20,700
e. Given the result in part-d, what open market operation would you use to keep the money supply at the level in the part of Module 5?
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