In the Federal Funds Market, the demand schedule for reserves is given as follow
ID: 1203333 • Letter: I
Question
In the Federal Funds Market, the demand schedule for reserves is given as follows: i = 130/(R+0.1) where R is the quantity of reserves. The public held all of its deposits in transaction accounts.
a) When the federal funds rate was 0.05 (i=0.05) as it was in 2007, what was the quantity of reserves the banks held (R)?
b) In 2007 only, the currency held by the public was 5000, the required reserve ratio was 0.1 and banks only held required reserves. What was the money multiplier in 2007?
c) Now, suppose in 2009 the federal funds rate was i = 0.0025. How many reserves did the banks hold? Note: They may hold excess reserves in 2009.
d) If the currency held by the public was 5000 in 2009 and the amount of deposits was the same as it was in 2007, what was the multiplier in 2009?
Explanation / Answer
i = 130/(R+0.1)
i(R+0.1) = 130
iR = 130 – 0.1i
R = (130 – 0.1i) / i
= (130 – 0.005) / 0.05 = 129.995 / 0.05 = 2,599.90
Money multiplier = 1 / rr
= 1 / 0.1 = 10
R = (130 – 0.1i) / i
= (130 - 0.00025) / 0.0025
= 129.99975 / 0.0025 = 51,999.90
Money multiplier = 1 / rr
= 1 / 0.1 = 10