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Suppose that currency in circulation is $800 billion, the amount of checkable deposits is $1200 billion, the required reserve ratio is 10% and excess reserves are $12 billion. a. Calculate the money supply, the currency-to-deposit ratio, the excess reserve ratio, and the money multiplier. b. Suppose the central bank conducts an unusually large open market purchase of bonds held by banks of $2000 billion due to a sharp contraction in the economy. Assuming the ratios you calculated in part (a) remain the same, predict the effect on the money supply. c. Suppose the central bank conducts the same open market purchase as in part (b), except that banks choose to hold all of these proceeds as excess reserves rather than loan them out, due to fear of a financial crisis and bank run. Assuming that currency and deposits remain the same, what happens to the amount of excess reserves, the excess reserve ratio, the money supply, and the money multiplier? d. Go to the FRED web site and graph the Fed's M1 multiplier from January 1995 to December 2016. How does the scenario in part c relate to the graph you created? Include your graph in your submission.

Suppose that currency in circulation is $800 billion, the amount of checkable deposits is $1200 billion, the required reserve ratio is 10% and excess reserves are $12 billion. a. Calculate the money supply, the currency-to-deposit ratio, the excess reserve ratio, and the money multiplier. b. Suppose the central bank conducts an unusually large open market purchase of bonds held by banks of $2000 billion due to a sharp contraction in the economy. Assuming the ratios you calculated in part (a) remain the same, predict the effect on the money supply. c. Suppose the central bank conducts the same open market purchase as in part (b), except that banks choose to hold all of these proceeds as excess reserves rather than loan them out, due to fear of a financial crisis and bank run. Assuming that currency and deposits remain the same, what happens to the amount of excess reserves, the excess reserve ratio, the money supply, and the money multiplier? d. Go to the FRED web site and graph the Fed's M1 multiplier from January 1995 to December 2016. How does the scenario in part c relate to the graph you created? Include your graph in your submission.

Essentials of Economics (MindTap Course List)
Essentials of Economics (MindTap Course List)
8th Edition
ISBN:9781337091992
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter21: The Monetary System
Section: Chapter Questions
Problem 12PA
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Question: Suppose that currency in circulation is $800 billion, the amount of checkable deposits is $1200 billion, the required reserve ratio is 10% and excess reserves are $12 billion. a. Calculate the money supply, the currency-to-deposit ratio, the excess reserve ratio, and the money multiplier. b. Suppose the central bank conducts an unusually large open market purchase of bonds held by banks of $2000 billion due to a sharp contraction in the economy. Assuming the ratios you calculated in part (a) remain the same, predict the effect on the money supply. c. Suppose the central bank conducts the same open market purchase as in part (b), except that banks choose to hold all of these proceeds as excess reserves rather than loan them out, due to fear of a financial crisis and bank run. Assuming that currency and deposits remain the same, what happens to the amount of excess reserves, the excess reserve ratio, the money supply, and the money multiplier? d. Go to the FRED web site and graph the Fed's M1 multiplier from January 1995 to December 2016. How does the scenario in part c relate to the graph you created? Include your graph in your submission.
Transcribed Image Text:Question: Suppose that currency in circulation is $800 billion, the amount of checkable deposits is $1200 billion, the required reserve ratio is 10% and excess reserves are $12 billion. a. Calculate the money supply, the currency-to-deposit ratio, the excess reserve ratio, and the money multiplier. b. Suppose the central bank conducts an unusually large open market purchase of bonds held by banks of $2000 billion due to a sharp contraction in the economy. Assuming the ratios you calculated in part (a) remain the same, predict the effect on the money supply. c. Suppose the central bank conducts the same open market purchase as in part (b), except that banks choose to hold all of these proceeds as excess reserves rather than loan them out, due to fear of a financial crisis and bank run. Assuming that currency and deposits remain the same, what happens to the amount of excess reserves, the excess reserve ratio, the money supply, and the money multiplier? d. Go to the FRED web site and graph the Fed's M1 multiplier from January 1995 to December 2016. How does the scenario in part c relate to the graph you created? Include your graph in your submission.
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