Macroeconomics
10th Edition
ISBN: 9781319105990
Author: Mankiw, N. Gregory.
Publisher: Worth Publishers,
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Chapter 4, Problem 4QQ
To determine
The relationship between the rate of interest on reserves and the money multiplier and the money supply.
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If the monetary base increases by $1 million and the quantity of money increases by $2.5 million, then the money multiplier is _
a.
Assume that all the money is held as a deposit while banks keep 10% of the deposit as
a reserve. Estimate the money multiplier and money supply in the economy.
b.
Assume that the public is holding 40% of their assets as currency while depositing the
remaining in banks, while banks keep 10% of deposit as a reserve. Estimate the money
multiplier and money supply in the economy.
A purchase of U.S. government securities by the Fed causes
A.
a multiple contraction of the money supply because deposits fall by more than the amount of the securities purchased.
B.
a contraction of the money supply equal to the amount of the securities because all other transactions occur within the banking system.
C.
an expansion of the money supply equal to the amount of the securities because all other transactions occur within the banking system.
D.
a multiple expansion of the money supply because the required reserve ratio is less than one
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- 5. The simple money multiplier Suppose that the Federal Reserve ("the Fed") buys $150,000 of U.S., government bonds and the required reserve ratio is 0.30. If the assumptions of the simple money multiplier hold, this will the money supply by Which of the following assumptions is necessary for the simple money multiplier to be applicable? The amount of cash people want to hold doesn't change when the money supply changes People's marginal propensity to consume does not rise with income. Borrower default rates are stable. If the correct assumption did not hold, the change in the money supply would be describes why this holds true? than you previously found. Which of the following If people kept some of the new money as cash rather than depositing it in another bank, this cash could not in turn become a bank loan. If people's marginal propensity to consume rose with income, they would save less, removing money from the financial system.arrow_forwardQuestion 2 on Topic 5 Most 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_forwardSome individuals have suggested raising the required reserve ratio for banks to 100 percent in a limited reserve banking system. a. What would the money multiplier be if this change was made? Assume people hold no cash. Instructions: Enter your response as a whole number. b. What effect would such a change have on the money supply? The money supply would decrease c. How could that effect be offset? By a decrease in government spending By an increase in government spending By an increase in taxesarrow_forward
- Since October 2008, the Federal Reserve has paid interest on excess reserves held by banks Under these circumstances, if the Fed buys Treasury securities worth $200 million from a bank, how will the money supply be affected? Assume that the required reserve ratio is 10% and that all currency is deposited into the banking system. Choose one: A The money suppply will increase by less than $2 billion. B. The money supply will not change at all C. The money supply will increase by $2 billion. D. The money supply will increase by more than $2 billion.arrow_forwardBUSN5 CH2 WKSMultiple ChoiceIdentify the choice that best completes the statement or answers the question.1. Define economics.a) a financial and social systemb) the study of a country’s overall economic issuesc) the integration between consumers, families, and businessesd) the study of the choices that different entities make in allocating resources2. Macroeconomics focuses ona) the major issues facing the national economy, but has little or no relevance to individuals.b) smaller economic units such as individual consumers, families, and individual businesses operating within the economy.c) the major issues facing the national economy that may seem abstract, but directly affect an individual’s day-to-day life. d) the role of government, while microeconomics focuses on the private sector.3. After the collapse of the dot com bubble and the 9/11 terrorist attacks, the stock market depreciated and unemployment increased leading many to fear that the…arrow_forwardThe Fed wants to change the reserve requirement in order to change the money supply (MS and MM currently is $3,000 and 3 respectively). For each situation below, calculate the current reserve requirement and the amount by which the Fed must change the reserve requirement to achieve the desired change in the money supply. Assume no cash holdings. a. Money multiplier is 3 and the Fed wants to increase money supply by $300. b. Money multiplier is 2.5 and the Fed wants to increase the money supply by $300. c. Money multiplier is 4 and the Fed wants to decrease the money supply by $500. d. Money multiplier is 4 and the Fed wants to increase the money supply by $1,000.arrow_forward
- 1. The demand curve for money will shift to the right because of a:A) fall in the interest rate.B) rise in real GDP.C) rise in the interest rateD) fall in real GDP. 2. The money demand curve is _________ because a lower interest rate ___________.A) upward-sloping; increases the opportunity cost of holding moneyB) downward-sloping; increases the opportunity cost of holding moneyC) upward-sloping; decreases the opportunity cost of holding moneyD) downward-sloping; decreases the opportunity cost of holding money 3. Suppose a bank has excess reserves of P800 and the reserve ratio is 10%. If Diana deposits P1,500 of cash into her checking account and the bank lends P600 to Russell, that bank can lend an additional:A) P1,550 B) P1,300 C) P2,000 D) P1,350 4. To increase the money supply, the central bank could:A) lower the discount rate.B) make open-market purchases.C) lower reserve requirements.D) lower the discount rate, make open-market purchases, or lower reserve requirements. 5. A…arrow_forwardSuppose the Federal Reserve sets the reserve requirement at 20%, banks hold no excess reserves, and no additional currency is held. Instructions: In part a, round your answer to two decimal places. In part b, enter your answer as a whole number. a. What is the money multiplier? b. How much will the total money supply Increase by If the Federal Reserve Increases reserves by $400 million? million c. When the Federal Reserve Increases the reserve requirement, the money multiplier will [(Click to select) reserves will have [(Click to select) effect on the money supply. and an increase inarrow_forwardEconomics If the Fed increases the monetary base by $73 million and the money multiplier is 1.6, money supply will increase by $______ million.arrow_forward
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