Can you please solve this out in steps so i can know how to do it later on... 1.
ID: 1180158 • Letter: C
Question
Can you please solve this out in steps so i can know how to do it later on...
1. Suppose that currency in circulation is $600 billion, the amount of checkable deposits
is $900 billion, excess reserves are $15 billion, and the required reserve ratio on
checkable deposits is 10%.
a. Calculate the money supply, the currency deposit ratio, the excess reserve ratio,
and the money multiplier.
b. Suppose the central bank conducts an unusually large open market purchase of
bonds held by banks of $1,400 billion due to a sharp contraction in the economy.
Assuming the ratios you calculated in part a are the same, what do you predict will
be the effect on the money supply?
c. Suppose the central bank conducts the same open market purchase as in part b,
except that banks choose to hold all of these proceeds as excess reserves rather than
loan them out, due to fear of a financial crisis. Assuming that currency and deposits
remain the same, what happens to the amount of excess reserves, the excess reserve
ratio, the money supply, and the money multiplier?
d. Following the financial crisis in 2008, the Federal Reserve began injecting the
banking system with massive amounts of liquidity, and at the same time, very little
lending occurred. As a result, the M1 money multiplier was below 1 for most of the
time from October 2008 through 2011. How does this relate to your answer to part
c?
. 2. What does the Taylor rule imply that policymakers should do to the fed funds rate
under the following scenarios?
a. Unemployment rises due to a recession.
b. An oil price shock causes the inflation rate to rise by 1% and output to fall by 1%.
c. The economy experiences prolonged increases in productivity growth while actual
output growth is unchanged.
d. Potential output declines while actual output remains unchanged.
e. The Fed revises its (implicit) inflation target down.
Explanation / Answer
I don't think that the answer provided by survya01 is correct. From the beginning, I believe that the currency to deposit ratio should have been .67 or 2/3. My understanding is that the formula for the equation is currency/deposits, as oppossed to the work shown above as deposits/currency.