Question

Answer Part B please

2. Suppose that currency in circulation is $600 billion, the amount of chequable deposits is $900 billion, excess reserves are $15 billion, and the desired reserve ratio ra 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 $1400 billion due to a sharp contraction in the economy. Assuming the ratios you calculated in part (a) remain the same, predict the effect on the money supply.

Answer 1

Solution:-

(A)Money supply = Currency in circulation + Checkable deposits.

                                  = 600 Billion + 900 Billion

                                  = $ 1500 Billion.

Currency deposit ratio = Currency in circulation / Checkable deposits.

                                            = 600 Billion / 900 Billion

                                            = 0.6667 or 66.67 % (approx.)

Excess reserve ratio = Excess reserves / Checkable deposits.

                                        = 15 Billion / 900 Billion

                                        = 0.0167 i.e., 1.67 % (approx.)

Monetary Base = Currency + Total reserve

                              = $600 Billion + $15 Billion + $900 Billion * 10%

                              = $705 Billion

Money Multipliers = Money Supply / Monetary Base

                                    = $1500 Billion / $705 Billion

                                    = 2.13

Money supply	$ 1500 Billion.
Currency deposit ratio	0.6667 or 66.67 % (approx.)
Required reserve ratio	0.0278 i.e., 2.78 % (approx.)
Money Multiplier	2.13 (approx.)

Question b). Solution:- Increase in money supply = 1400 Billion * 2.13 = $ 2982 Billion.

Conclusion:- Money supply increases / rises by $ 2982 billion.