PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
7th Edition
ISBN: 9781260110920
Author: Frank
Publisher: MCG
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Chapter 10, Problem 2RQ
To determine
Determine the changes in money supply when the people use more currency for shopping instead of checks.
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According to your graph, the equilibrium value of money is (0.25, 0.50, 0.75, 1.00) therefore the equilibrium price level is (1.00, 1.33, 2.00, 4.00).
Now, suppose that the Fed reduces the money supply from the initial level of $4 billion to $2.5 billion.
In order to reduce the money supply, the Fed can use open market operations to (sell bonds to – buy bonds from) the public.
Use the purple line (diamond symbol) to plot the new money supply (MS2).
Immediately after the Fed changes the money supply from its initial equilibrium level, the quantity of money supplied is (greater – less) than the quantity of money demanded at the initial equilibrium. This contraction in the money supply will (increase – reduce) people’s demand for goods and services. In the long run, since the economy’s ability to produce goods and services has not changed, the prices of goods and services will (rise – fall) and value of money will (rise – fall)
Bank Three currently has $600 million in transaction deposits on its balance sheet. The Federal Reserve has currently set the reserve requirement at 10 percent of transaction deposits. (LG 4-3)
If the Federal Reserve decreases the reserve requirement to 8 percent, show the balance sheet of Bank Three and the Federal Reserve System just before and after the full effect of the reserve requirement change. Assume Bank Three withdraws all excess reserves and gives out loans and that borrowers eventually return all of these funds to Bank Three in the form of transaction deposits.
Redo part (a) using a 12 percent reserve requirement.
consider the following development which happened at the same time: households reduced their currency holding in favor of bank deposits by $1 million and the Fed purchased a $1 million treasury bill from the U.S. government. what is the immediate or initial effect of these two actions on the money supply (M2)? A)M2 will increase by $1 million. B) M2 will remain the same. C)M2 will decrease by $1 million. D) M2 will increase by $2 million.
Chapter 10 Solutions
PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
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- The U.S. money supply (M1) at the beginning of 2015 was $2,683.3 billion broken down as follows: $1,165.7 billion in currency, $3.5 billion in traveler's checks, and $1,514.1 billion in checking deposits. Suppose the Fed decided to increase the money supply by decreasing the reserve requirement from 11 percent to 10 percent. Assume all banks were initially loaned up (had no excess reserves) and the quantity of currency and traveler's checks held outside of banks did not change. How large a change in the money supply would have resulted from the change in the reserve requirement? The money supply would change by $ billion. (Round your response to two decimal places and include a minus sign if necessary.)arrow_forwardThe quantity equation, also known as the equation of exchange, shows that the product of the money supply (M) and the velocity of money (V) is equal to the product of the price level (P) and real GDP (Q): Mx V = PxQ. Observe that when the left-hand side of the quantity equation, Mx V, changes by a given percentage, the right-hand side, P x Q, must change by the same percentage: Percentage Change in (Mx V) = = You can use the rule that the percentage change in the product of two variables is approximately equal to the sum of the percentage changes in each of the variables (as long as the percentage changes are fairly small) to further analyze changes in the variables of the quantity equation. In the following equation, let "%A" stand for "percentage change in": %AM+%AV = = Percentage Change in (PxQ) %AP+%AQ For example, if you know that the money supply grows at a rate of 8% per year, velocity grows at a rate of 1% per year, and real GDP grows at a rate of 5% per year, you can use this…arrow_forwardThree countries are in a currency union. The countries are identical in that each has the same equilibrium level of output of £50 billion consistent with the same real interest rate of 2%, but each country is currently experiencing a different level of inflation as shown in Table 1. If the central bank for the currency union sets its (nominal) base rate at 7%, which one of the countries is likely to see an increase in its aggregate demand? (Hint: you need to use the real interest rate equation given in Chapter 8, Section 2.2 and may wish to review Chapter 8, Section 2.4.) Table 1 Information about three countries Country A Country B Country C Equilibrium output £50 billion £50 billion £50 billion Equilibrium real 2% 2% 2% interest rate Inflation rate 2% 5% 9% Select one: O Country A O Country B O Country C MacBook 80 DIN F1 F2 F3 F4 F5 F6 F7 FE @ € £ # $ & * 2 3 4 7 8. Q W E R Y COarrow_forward
- The quantity equation, also known as the equation of exchange, shows that the product of the money supply (M) and the velocity of money (V) is equal to the product of the price level (P) and real GDP (Q): Mx V = P x Q. Observe that when the left-hand side of the quantity equation, Mx V, changes by a given percentage, the right-hand side, P x Q, must change by the same percentage: Percentage Change in (M x V) = Percentage Change in (PxQ) You can use the rule that the percentage change in the product of two variables is approximately equal to the sum of the percentage changes in each of the variables (as long as the percentage changes are fairly small) to further analyze changes in the variables of the quantity equation. In the following equation, let "%A" stand for "percentage change in": %AM+%AV = %AP+%AQ For example, if you know that the money supply grows at a rate of 8% per year, velocity grows at a rate of 1% per year, and real GDP grows at a rate. of 5% per year, you can use this…arrow_forward5. Changes in the money supply The following graph represents the money market in a hypothetical economy. As in the United States, this economy has a central bank called the Fed, but unlike in the United States, the economy is closed (that is, the economy does not interact with other economies in the world). The money market is currently in equilibrium at an interest rate of 2.5% and a quantity of money equal to $0.4 trillion, as indicated by the grey star. 45 Money Demand New MS Curve + New Equilibrium 4.0 3.5 3.0 2.5 2.0 INTEREST RATE (Percent) 55555 1.5 1.0 0.5 0 0.1 Money Supply 0.2 0.3 0.4 0.5 0.6 MONEY (Trillions of dollars) 0.7 0.8arrow_forwardMost people in the country of Classica tend to keep $3 out of every $100 of their cash holdings in their wallets. The central bank has instructed the commercial banks to also hold 4% of all bank deposits as reserves. Calculate the extended money multiplier Suppose that in 2018 customers deposit $4,000 into their bank accounts. Based on the extended money multiplier calculated in part (i), calculate the total amount which the money supply in the banking system will eventually increase to. Show all steps involved in the calculation.arrow_forward
- The following graph represents the money market for some hypothetical economy. This economy is similar to the United States in the sense that it has a central bank called the Fed, but a major difference is that this economy is closed (and therefore does not have any interaction with other world economies). The money market is currently in equilibrium at an interest rate of 3% and a quantity of money equal to $0.4 trillion, designated on the graph by the grey star symbol. INTEREST RATE (Percent) 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0 Money Demand 0.1 0.2 0.3 0.4 Money Supply 0.5 0.6 0.7 0.8 New MS Curve New Equilibrium ?arrow_forwardMost people in the country of Classica tend to keep $3 out of every $100 of their cash holdings in their wallets. The central bank has instructed the commercial banks to also hold 4% of all bank deposits as reserves. Calculate the extended money multiplier Suppose that in 2018 customers deposit $4,000 into their bank accounts. Based on the extended money multiplier calculated in part (i), calculate the total amount which the money supply in the banking system will eventually increase to. Show all steps involved in the calculation. In which situation can the simple money multiplier value equal that of the extended money multiplier value? Justify your answer with a numerical example.arrow_forwardInternational Gold Standard (19th century): If different countries fix the price of their currencies e in terms of gold this immediately implies that e are fixed. If the Central Bank of two countries stand ready to buy and sell gold at a fixed price in terms of their respective domestic currencies, then there is only one value of e that eliminates the possibility of arbitrage. Suppose that S100 buys 1 ounce of gold and 100 pounds buys lounce of gold. Under fixed exchange rates, this implies that IS buys Ipound. Explains what would happen (arbitrageurs' action and result) if instead e-1S buys 2 poundsarrow_forward
- Suppose a central bank has a required reserve ratio of 6.6% for all banks and the central bank changes reserves at one of these banks by $536. By how much will the money supply change, at most, after all the effects of the money multiplier? (Round this to two digits after the decimal and enter this value as either a positive value or a negative value without the dollar sign.)arrow_forwardTo counter the economic disruption resulting from the 2020 pandemic, the Federal Reserve reduced the commercial bank reserve requirement to 0% instead of 10% in 2019. Please discuss how this Federal Reserve action supported the economic recovery from the pandemic and affected the money supply. In addition, the Federal Reserve started buying monthly $80 billion of US Treasury bonds and $40 billion of Mortgage Backed Securities. Please discuss how this Federal Reserve action supported the economic recovery from the pandemic and affected the money supply and yields/interest rates.arrow_forwardSuppose the Fed announces that it is raising its target interest rate by 25 basis points, or 0.25 percentage point. To do this, the Fed will use open-market operations to the money by the public. Use the green line (triangle symbol) on the previous graph to illustrate the effects of this policy by placing the new money supply curve (MS) in the correct location. Place the black point (plus symbol) at the new equilibrium interest rate and quantity of money. Suppose the following graph shows the aggregate demand curve for this economy. The Fed's policy of targeting a higher interest rate will the cost of borrowing, causing residential and business investment spending to and the quantity of output demanded to at each price level. Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.arrow_forward
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