Question

Problem #4 Consider a simple economy in which money supply (think of M1) is determined through actions of the central bank, non-bank public, and commercial banks. Assume that the central bank influences the size of the monetary base and the public and commercial banks decide on the value of deposits and excess reserves. i)Imagine that in a given point in time the value of the monetary base is equal to 100, the public chooses not to hold any currency, and commercial banks hold only required reserves, which are supposed to be equal to 10% of checkable deposits. What is the value of money supply in this case? ii) Now, assume that commercial bank choose to hold excess reserves. twice as much as they are required. What do you expect the money supply to be now? Specifically, assume that they hold iii) Now What is the value of the money multiplier in this case? to split their portfolios equally between currency and deposits assume that the public chooses iv) Continue with assumptions of ii) and iii). What would be the instantaneous impact if the central bank engaged in a purchase of securities worth 10 through on money supply an open market operation?

Answer 1

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