11. Assume the following information about the banking system Quantities in bill

Question

11. Assume the following information about the banking system

Quantities in billions of dollars                       

Currency (C) = $762                               

Excess Reserves ( R ) = $66

Required reserves (RR0 = $0                                 

Checking deposits (D ) = $604           

Give the numerical answer to the following questions:

a. What is the size of the monetary base?

b. What is the money supply in the economy?

c. What is the size of the money multiplier?

Assume that the currency to deposit ratio rises to 1.5

a. Compute the effect of the change in currency to deposit ratio on the money multiplier, m

b. What will happen to the money supply given the monetary base?

c. If the Fed wants to keep the money supply at the initial level, how must the Fed adjust the monetary base? Explain

d. What open market operations should the Fed conduct to adjust the monetary base to keep the money supply at the initial level?

e. By how much must the Fed adjust the monetary base to keep the money supply at its initial level?

f. How much must the Fed buy or sell in the government bonds to keep the money supply at the initial level?

12. Assume that the MB = $828, Money supply = $1366 and thel money multiplier

m= 1.650. The non-bank public shifts $40B currency to deposits and the Fed wishes to keep the money supply at the level of $1366 B. Explain verbally and show numerically the following:

a. What will happen to the level of reserves in the banking system?

b. What will happen to the monetary base?

c. What will happen to the money multiplier?

d. By how much will the money supply increase or decrease as the result of the non-bank public action?

e. How should the Fed respond given his goal of keeping the money supply at the initial level? Explain

f. What open market operations should the Fed conduct to adjust the monetary base and keep the money supply constant? Explain

g. How much in the government bonds should the Fed buy or sell to keep the money supply constant?

13. Use demand and supply graphs for the federal funds market (market for reserves) to analyze the following situations. Be sure that your graphs clearly show changes in the equilibrium federal funds rate and the equilibrium level of reserves and the Fed action to keep the equilibrium federal fund rate unchanged ( (at the target)

a. Suppose that banks decrease their demand for reserves

b. Suppose that the Fed decides to decrease the required reserve ratio.

c. Suppose that banks increase their demand for reserves

d. Suppose the Fed decreases the discount rate

e. Suppose that the Fed decreases the interest rate on reserves

14. Use the supply and demand analysis of the market for reserves to explain and illustrate the effect of the following events on the federal funds rate and the Fed action to keep the equilibrium interest rate its target. Assume that initial equilibrium federal funds rate is 4 percent

a. There is a switch from currency into deposits, everything else held constant.

b. The Fed decreases discount rate by 50 basis points, everything else held constant

c. Public decided to hold more currency, everything held constant

d. The Fed started to pay interest rate on excess reserves, everything held constant

e. The Fed purchases through the open market $3 billion of Treasury bonds.

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