20. (10 points) The following table shows information on reserve balances and co

Question

20. (10 points) The following table shows information on reserve balances and components of M1 for May 2015 Billions of $ 1,295 2,584 Currency Total reserve balances Excess reserve balances 2.492 Required reserve balances 1,693 Total checkable deposits M1* MB M2 11,936 er ignore travelers checks a. (3 pts)Fill in the blanks b. (2 pts) Calculate the M1 money multiplier, mml c. (2 pts) Calculate the M2 money multiplier, mm2. d. (1 pt) Assume mml is constant. If the Fed purchases $1 billion in securities, what is the predicted increase in M1? e. (2 pts) Under what conditions would the money expansion be greater than what you predicted in part c.

Explanation / Answer

We know that M1 = currency in circulation + traveler’s checks + checkable deposits + savings and loan associations,+ saving banks + credit unions. M2 = M1 + money market mutual funds + time deposits + savings deposits

Hence we have M1 = 1295 + 1693 = 2988. Required reserves = 2584 - 2492 = 92

Monetary base = C + RR = 1295 + 92 = 1387

c = C-D ratio = 1295 / 1693 = 76.49%

er = ER-D ratio = 2492/1693 = 147.19%

q = RR-D ratio = 92/1693 = 5.43%

b) mm1 = (1 + 0.7649)/(0.7649 + 1.4719 + 0.0543) = 0.77

c) Note that M2 = 11936

11936 = 2988 + money market mutual funds + time deposits + savings deposits

Money market mutual funds + time deposits + savings deposits = 8948

Hence T/D + MMMF/D = (T + MMMF)/D = 8948/1693 = 5.29

mm2 = (1 + C-D + T/D + MMMF/D)/(R-D + ER-D + C-D) = (1 + 0.76490 + 5.29)/(0.7649 + 1.4719 + 0.0543) = 3.08

d) MB rises by $1 billion so money supply increases by $1 billion x mm1 = 1x0.77 = 0.77 billion. This will be the required increase in money supply

Related Questions

Navigate

• Browse (All)
• Browse 2
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.