1. Assume initially that: Currency = $2,200 DD = $4,000 e = .333 required reserv
ID: 1114413 • Letter: 1
Question
1. Assume initially that:
Currency = $2,200
DD = $4,000
e = .333
required reserves = $240
TD = $12,000
MMMF = $1,400
Determine the initial levels of: kdd, kM1, kM2, MB, M1, M2, and ER.
2. Now the Fed conducts a $350 open market sale reducing reserves and increasing the interest rate. Determine the final values for: MB, M1, M2, Currency, DD, ER, RR, TD, kM1, and kM2 after the OM sale runs fully through the deposit creation process.
3. Go back to the original data given in question 1. Determine the effect on MB, M1, M2, Currency, DD, ER, RR, TD, kM1, and kM2 if the currency to DD ratio “c” becomes .80.
4. Considering your answer to (3.), what OMO action would be necessary to keep M1 at its original level if c changes to .80?
Explanation / Answer
1.
We know the equation MB= C+R (Monatary Base equals the currency plus the reserves in the economy.
R=ER+RR (Total Reserves equal the excess resserves plus the required reserves)
ER= e × d (
RR= r × d
ER= 0.333 × 4000= 1332 (Excess Reserves)
MB= 2200+240+1332=3772 (Monatery Base)
= $3772
Kdd= The banks deposits are assumed to be constant
r=RR/D
=240/4000
=0.06 or 6 percent
= e + r= 0.06+0.333=0.393
Km1=
m1= M1/MB
M1=C + D
4000+ 2200= $6200
m1= M1/MB
6200/3772
= 1.644
Km2= M2/MB
MB=3772
M1=MI+MMF
6200+1400
=$7600
Km2= M2/MB
7600/3772= 2.015
2.
B=TD (RTD+k)
Where k is the currency ratio
C=C/D
=2200/4000
=0.55
350=TD (RTD+0.55)
350=TD (240.55)
=TD= 350/240.55
=1.455
MB= 3772+350=4122
=$4122
m1=D+C
=4000+2200
=$6200
M2=M1+MMF+T
Where T is zero
6200+1400=$7600
Currency =$2200
DD=4000-350
=$3650 (Demand Deposits)
ER=1332 (Excess Reserves)
RR=240 (Required Reserves)
TD= 1.454998961 × 12000 (Change in deposits)
=$17459.988
Km1=M1/MB
=6200/4122
=1.504
Km2=M2/MB
=7600/4122
=1.844
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