Economics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN: 9781305506725
Author: James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher: Cengage Learning
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Chapter 14, Problem 6CQ
To determine
Identify the growth rate of M1 and M2 during the past 12 months.
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Suppose you examine the central bank’s balance sheet and observe that since the previous day, reserves had risen by $400 million. In addition, on the asset side of the central bank’s balance sheet, securities had risen by $400 million. What activity did the central bank carry out earlier in the day to lead to these changes in the balance sheet? Do you think by carrying out this activity the central bank was aiming to increase, decrease, or maintain the size of the money supply?
The central bank conducted an open market (purchase /sale) of $400 million with a commercial bank. This transaction would involve $400 million of securities being ( added to / removed from) the central bank’s balance sheet. There would be (an increase / a fall ) of $400 million in reserves to reflect the related payment ( to / by ) the commercial bank ( from / into) its reserve account. By carrying out this activity, the central bank was aiming to (increase / decrease) maintain the size of the money supply.
The U.S. money supply (M1) at the beginning of 2015 was $2,683.3 billion broken down as follows: $1,165.7 billion in currency, $3.5 billion in traveler's checks, and
$1,514.1 billion in checking deposits.
Suppose the Fed decided to increase the money supply by decreasing the reserve requirement from 11 percent to 10 percent. Assume all banks were initially
loaned up (had no excess reserves) and the quantity of currency and traveler's checks held outside of banks did not change.
How large a change in the money supply would have resulted from the change in the reserve requirement?
The money supply would change by $ billion. (Round your response to two decimal places and include a minus sign if necessary.)
Suppose that you take $150 in currency out of your pocket and deposit it in your checking account. If the required reserve ratio is 9%, what is the largest amount (in dollars) by which the money supply can increase as a result of your action?Include the $150 as part of the new money supply and assume the bank does not hold excess reserves. Give your answer to two decimals
Chapter 14 Solutions
Economics: Private and Public Choice (MindTap Course List)
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- Suppose that the reserve requirement is 8%, the excess reserves-to-deposit ratio is 0.51, and the currency-to-deposit ratio is 0.34. The value of the money multiplier is 1.44. (Enter your response rounded to two decimal places.) If the Fed conducts an open market operation and buys $10 million worth of bonds from banks, what happen to the money supply? The money supply will by $ million. (Enter your response rounded to two decimal placearrow_forwardConsider the following dialog between Susan, a student studying a chapter on “Money and the Banking System” and Megan, her teaching assistant. SUSAN: Hi Megan. Before I begin my homework, I'd like to make sure that I understand how banks create money. SUSAN: I'm glad you asked this question, Susan. When I began studying money and banking, I was fascinated by the banks' ability to create money. It does look like a trick when banks use excess reserves to lend money, and thus increase their assets. Borrowers then deposit new loans, which increases both bank deposits and excess reserves. This process is called deposit expansion. As a result, the money supply will increase. MEGAN: By the same logic, when required reserves fall, banks _______ (cease, continue) granting new loans, which causes ____ (assets, liabilities) to decrease. This process is called ______ (deposit expansion, deposit destruction). As a result, the money supply will decrease.arrow_forwardCan someone help me with this question? I have no idea how to do.arrow_forward
- In the U.S., currency in circulation (C) is $1.2 trillion and the monetary base (B) is $3.7 trillion. Assume the reserve-deposit ratio (rr) and the currency-deposit ratio (cr) are both 0.25. What is the size of bank reserves (R)? What is the money multiplier? What is the money supply? What is the velocity of money if nominal GDP is $17 trillion? If the FOMC increases bank reserves (R) by $0.5 trillion and banks choose to hold all the additional reserves rather than loan them out, what is the new money supply? What is the new money supply if instead banks loan out 50% of the additional new reserves and households deposit all the additional loans? Assume that the velocity of money is constant and real GDP is growing at 1%. Use the numbers in part (a) to answer the next question. If the Fed wishes to keep the price level constant, how much (in dollars) do they need to increase the money supply?arrow_forwardAssume that the money multiplier m = (1+c)/(r+e+c). Where c is the currency deposit ratio, e is the excess reserve ratio and r is the required reserve ratio. a) With examples, explain what will cause an increase in the ratios c, e and r b) Explain the implications of an increase in each of the ratios on the ability of the central bank to increase money supply by increasing the monetary base. Page 1 of 2 c) Assume that consumers trust in the banking sector improves because of more transparent banking practices. How will this affect the money multiplier and the central bank's monetary control?arrow_forwardAssume that banks hold no excess reserves and that all currency is deposited into the banking system. If the required reserve ratio is 10.00%, and the Federal Reserve wants to increase the money supply by $60.00 million, the Fed would need to make an open market purchase of $ million. (Insert your answer in millions, and round to two decimal places.) Assume that banks hold no excess reserves and that all currency is deposited into the banking system. If the required reserve ratio is 5.00%, and the Federal Reserve wants to decrease the money supply by $70.00 million, the Fed would need to make an open market sale of $ million. (Insert your answer in millions, and round to two decimal places.) Suppose that banks decide to hold excess reserves. In order for the Federal Reserve to change the money supply by the same amounts as in parts 1 and 2, it would need to make Choose one: A. a smaller open market purchase but a larger open market sale. B. a larger open market purchase but a smaller…arrow_forward
- Explain answers to both questions, please. a）If the reserve requirements are stable at 20%, and the actual M2 money multiplier is stable at 3, what is the Long Run growth rate of reserve money supply that the central bank should aim at in order to achieve the growth rate of the money supply of 11%？ b) Suppose that, because of changes in the institutional structure of the financial system, the velocity of money increased by 2% per year for 3 years. If the central bank was unaware of the change in money velocity and enacted the growth rate of money supply 11%， what would the inflation rate end up being after 3 years?arrow_forwardAssume that banks are able to lend out 85 cents on every dollar deposited, and a bank receives $9,000 in deposits. What is the reserve requirement? Find the money multiplier. How much money is ‘created’ from the $9,000 deposit? If the reserve requirement is altered to 10%, what will this do to the money supply? What does this do to equilibrium interest rate in the market for loanable funds? (Show on a graph.) What is another way the Federal Reserve will achieve the same outcome in Part D?arrow_forwardSuppose that a $100 purchase of government bonds by the U.S. Federal Reserve causes a $200 increase in the money supply in an economy in which banks hold 25 percent of deposits as reserves. What percentage of bank deposits is held as currency?arrow_forward
- Assume the reserve requirement is 15%. If the Fed increases reserves by $30 billion, what is the total increase in the money supply?arrow_forwardOne of the instruments available for controlling money supply is Open Market Operation(OMO). Explain briefly this instrument and how it works to control money in circulation!arrow_forwardConsider an economy that currently has a monetary base of $3 trillion, the required reserve ratio is 10% of deposits, banks hold an additional 65% of deposits in excess reserves and the currency-to-deposit ratio is 30%. What is the money multiplier for this economy?arrow_forward
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