2009 AP MACROECONOMICS FREE-RESPONSE QUESTIONS Cosh t Chee 3. Assume that the re
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2009 AP MACROECONOMICS FREE-RESPONSE QUESTIONS Cosh t Chee 3. Assume that the reserve requirement is 20 percent and banks hold no excess reserves (a) Assume that Kim deposits $100 of cash from her pocket into her checking account. Calculate each of the following G) The maximum doilar amount the commercial bank can initially lend (ii) The maximum total change in demand deposits in the banking system (ii) The maximum change in the money supply the open market purchase, calculate the maximum increase in the money supply in the banking system. (b) Assume that the Federal Reserve buys S5 million in government bonds on the open market. As a result of (c) Given the increase in the money supply in part (b), what happens to real wages in the short run? Explain. 61O STOP END OF EXAM Assets 100 DDExplanation / Answer
Answer (a)
(i) Since $100 is deposited in the bank , and the reserve requirement is 20 %, the bank would deduct 0.20 x 100 = $20 from $100. The remaining amount = $80. This is the maximum amount bank can lend.
(ii)The maximum total change in demand deposit = injected amount x (deposit multiplier)
= 100x(1/0.80)
= $125
(iii)Change in money supply = injected amount xmoney multiplier
= 100x(1/0.2)
= $500
Answer (b)
With the Frderal Bank depositing $5million, the total increase in money supply = $5 million x(1/0.2)
= $25 million
Answer (c)
With the rise in mone supply, the wages would also rise proportionally. The wages will go five times.
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