A. Calculate the currency-to-deposit ratio (c), the excess-reserves-to-deposit ratio (e) and the money multiplier (m) given...

A. Calculate the currency-to-deposit ratio (c), the excess-reserves-to-deposit ratio (e) and the money multiplier (m) given the following values:

rr = 0.20 C = $320 billion D = $1,000 billion ER = $60 billion

B. Calculate total required reserves (RR), total actual reserves (AR) and the monetary base (MB).

C. Now assume the FED lowers the required reserve ratio to 0.10. Calculate the new money multiplier (m’) and the new money supply (M1).

D. Calculate the new level of deposits (D’) and currency in circulation (C).

E. Calculate the new level of required reserves (RR’) and excess reserves (ER’).

Solutions

Expert Solution

A. Calculate the currency-to-deposit ratio (c), the excess-reserves-to-deposit ratio (e) and the money multiplier (m) given the following values:

rr = 0.20 C = $320 billion D = $1,000 billion ER = $60 billion

currency-to-deposit ratio = C/D = 320/1000 = 32%. or 0.32

excess-reserves-to-deposit ratio = ER/D = 60/1000 = 6%

Money multiplier = (1 + c)/(rr + c + e) = (1 + 0.32)/(0.20 + 0.06 + 0.32) = 2.2758

B. Calculate total required reserves (RR), total actual reserves (AR) and the monetary base (MB).

Total required reserve = 20% of deposits = 20% of 1000 = 200 billion

Total reserves = RR + ER = 260 billion

Monetary base = currency + reserves = 320 + 260 = 580 billion

C. Now assume the FED lowers the required reserve ratio to 0.10. Calculate the new money multiplier (m’) and the new money supply (M1).

New money multiplier = (1 + 0.32)/(0.10 + 0.06 + 0.32) = 2.75

Money supply = monetary base x multiplier = 580 x 2.75 = 1595 billion

D. Calculate the new level of deposits (D’) and currency in circulation (C).

C + D = 1595 billion

C/D = Assuming it to be unchanged = 32% so C = 32% of D

0.32D + D = 1595 billion

Hence Deposits = 1208.33 billion

Currency =386.67 billion (32%)

E. Calculate the new level of required reserves (RR’) and excess reserves (ER’).

RR = 10% of 1208.33 billion = 120.83 billion

ER = 6% of 1208.33 billion = 72.5 billion.

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

Define the following: Fractional reserve system Required reserves Excess reserves Money (deposit) multiplier Portfolio investment Leverage...

Define the following: Fractional reserve system Required reserves Excess reserves Money (deposit) multiplier Portfolio investment Leverage AS-AD model Connection between AD function model and AS-AD model (i.e. change in a,b,Ip,G,T,r) Inflation expectations Supply shocks Capacity Wage-price spiral

Assume that the currency-deposit ratio is 0.5, the required reserve ratio is 0.1, and the excess...

Assume that the currency-deposit ratio is 0.5, the required reserve ratio is 0.1, and the excess reserves to deposit ratio is 0.15. If the monetary base is $2 trillion, find (a) the amount of currency in circulation in billions of dollars; (b) required reserves in billions of dollars; and (c) excess reserves in billions of dollars. (d) simple deposit multiplier which ignores leakages. The amount of currency in circulation in billions of dollars: Required reserves in billions of dollars: Excess...

During the financial and economic crisis of 2007 and 2008, the excess reserves to deposit ratio...

During the financial and economic crisis of 2007 and 2008, the excess reserves to deposit ratio increased significantly. what do you think happened to the money supply?

An increase in the reserve requirement A) increases the money supply by decreasing excess reserves and decreasing the monetary multiplier

An increase in the reserve requirement A) increases the money supply by decreasing excess reserves and decreasing the monetary multiplier B) decreases the money supply by increasing excess reserves and decreasing the monetary multiplier c) decreases the money supply by decreasing excess reserves and decreasing the monetary multiplier D) increases the money supply by increasing excess reserves and increasing the monetary multiplierWhen the federal government cuts taxes and increases purchases to stimulate the economy during a period of recession, such actions are designed to...

Why are banks holding so many excess reserves and why is the money multiplier less than...

Why are banks holding so many excess reserves and why is the money multiplier less than one? (500 - 650 word explanation please!)

1.If bank reserves are 200, the public holds 500 in currency, and the desired reserve-deposit ratio...

1.If bank reserves are 200, the public holds 500 in currency, and the desired reserve-deposit ratio is 0.20, the money supply is ? 2. If consumption increases by $8 when disposable income increases by $16, the marginal propensity to consume (mpc) equals: 3. Suppose there is 2% frictional unemployment, 3% structural unemployment, and -2% cyclical unemployment, then the natural rate of unemployment equals: 4. In Macroland there is $6,000,000 in currency. The public holds half of the currency and banks...

How does an increase in the currency-to-deposits ratio affect the size of the money multiplier? How...

How does an increase in the currency-to-deposits ratio affect the size of the money multiplier? How does an increase in the reserve-deposit ratio (rr) affect the size of the money multiplier?

Use the data above to calculate the P/E ratio and the M/B ratio.

Balance Sheet (Millions) Income Statement (Millions) Assets Cash1,290 Net Sales51,600Receivables9,890 Operating Costs48,246Inventory13,760 Depreciation903Property, Plant and Equipment18,060 EBIT2,451Total Assets43,000 Interest927 EBT1,524Liabilities and Owners Equity Taxes320Accounts Payable8,170 Net Income1,204Notes Payable6,677 Wages Payable4,073 Other Data Long Term Bonds8,815 Shares Outstanding (millions)1000Total Liabilities27,735 Dividends (millions)$200.00Total Equity15,265 Current Interest Rate5.00%Total Liabilities and Owners Equity43,000 Tax rate21% Stock Price$50 Use the data above to calculate the P/E ratio and the M/B ratio.

Assume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is checkable deposits.

6. The reserve requirement, open market operations, and the money supply Assume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is checkable deposits. To simplify the analysis, suppose the banking system has total reserves of $400. Determine the money multiplier and the money supply for each reserve requirement listed in the following table A higher reserve requirement is associated with a _______ money supply.Suppose the Federal Reserve wants to increase...

Assume that no banks hold excess reserves and the public holds no currency (which implies that...

Assume that no banks hold excess reserves and the public holds no currency (which implies that ER = C = 0). If a bank sells a $100,000 security to the FED, explain what happens to this bank (Bank A) and two additional steps (or two additional banks, Bank B and Bank C) in the deposit expansion process assuming a 10% reserve requirement. Put differently, what will be the change in deposits for the first bank (ΔDA), the second bank (ΔDB),...

Subjects