Question

ECON2313 hw4 2019b View Review Mailings yout References AatbCeDE AaßbCcD: AalbCcDd E AaBb Aasb AaltbCeDdE Ap 4 A Aa Su Tele Heading 21 Headng 1 No Spacing Nerml A A Part II. Short Answer Questions 1. Explain how each of the following events affects the monetary base, the money multiplier, and the money supply. a. The Fed increases the interest rate it pays banks for holding reserves. When the Fed increases the interest rate, it pays banks to hold reserves. b. The Fed flies a helicopter over 5 Avenue in New York and drops newly printed $100 bills. c. Rumors about a computer virus attack on ATM machines increase the amount of money people hold as currency rather than demand deposits. 2. An economy has a monetary base of 1,000 $1 bills. Calculate the money supply in scenarios. a. All money is held as demand deposits. Banks hold 100 percent of deposits as reserves. b. All money is held as demand deposits. Banks hold 20 percent of deposits as reserves. c. People hold equal amounts of currency and demand deposits. Banks hold 20 percent of deposits as reserves. 3. In a country Panicia, the monetary base is $1,000. People hold a third of their money in the form of currency (and thus two-thirds as bank deposits). Banks hold a third of thecir deposits in reserve. a. What are the reserve-deposit ratio, the currency-deposit ratio, the money multiplier, and the money supply? b. One day, fear about the banking system strikes the population, and people now want to hold half their money in the form of currency. If the central bank does nothing, what is the new money supply? c. If, in the face of this panic, the central bank wants to conduct an open-market operation to keep the money supply at its original level, does it buy or sell govemment bonds? Calculate, in dollars, how much the central bank needs to transact (United States) Focus MacBook Pro 3 F4

Answer 1

1.a. With lesser incentive to make loans, the banks now will keep higher reserves due to the higher return on them. This increases the proportion of reserves to the deposits. this will reduce the multiplier effect which will further reduce the money supply created in the economy. holding more reserves will increase the monetary base of the economy.

b. With such an action, both the monetary base and the money supply will increase. The multiplier effect will depend on the consumer behaviour that wether they will deposit the amount in bank or keep it in the form of cash. If they deposit and the proportion of currency is more than the deposit then the multiplier will fall.

c. The currency too deposit ratio will increase which will decrease the multiplier, thus money supply will decrease too. the monetary base will be zero because the monetary base will increase due to citizens holding more currency and will decrease becuase banks have lesser reserves.