Macroeconomics
10th Edition
ISBN: 9781319105990
Author: Mankiw, N. Gregory.
Publisher: Worth Publishers,
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Question
Chapter 4, Problem 6PA
(a)
To determine
The money supply, the currency-deposit ratio, and the reserve-deposit ratio.
(b)
To determine
The money supply, the currency-deposit ratio, and the reserve-deposit ratio.
(c)
To determine
Identify the reason behind the fallen in money supply.
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Challenge Problem. The chapter mentions that an open market operation by the Fed can increase or decrease
the quantity of deposits in banks and therefore the money supply.
The change in the money supply from a Fed open market operation is given by the following equation:
Change in money supply = Change in reserves x1/ (RR+ ER)
where
RR = the percentage of deposits that banks are required to keep as reserves
ER
= the percentage of deposits that banks voluntarily hold as excess reserves
1/ (RR+ ER) = the "money multiplier"
Suppose the Fed decides to sell $16 billion in Treasury bonds. Assume that the reserve requirement is 10
percent, banks hold 3 percent in excess reserves, and the public holds no cash.
This action by the Fed causes the money supply to
by S billion. (Round your response to two
decimal places.)
Let us pretend that you are the director of monetary affairs for the Fed and you just got authority to pay interest on excess reserves. The initial conditions in the reserve and money markets, before the authority was granted are as follows:
rr = .10
C = 200
D = 4000
ER = 00
a) Show all of your work.
i) Calculate the MB.
ii) Calculate the money multiplier.
iii) What is the money supply (use mm x MB to calculate this)?
b) If Rd= 407.5 – 50 iff,given the information above, what is the market clearing federal funds rate? Show all of your work
Draw a reserve market diagram depicting exactly what is going on here! Label this initial equilibrium point as point A. (10 points for correct and completely labeled diagram)
c) So you get this authority and decide, along with the FOMC, that the most appropriate rate to pay on excess reserves would be 20 basis points (0.20%). Given these new conditions, explain what would happen reserve demand and why. You don't need to derive an…
The following graph shows an increase in the demand for money from 2013 (MD2013) to 2014 (MD2014) caused by an increase in aggregate output.
5.00%
5.25%
The initial equilibrium interest rate in 2013 was
Suppose the Federal Reserve (the Fed) chooses not to alter the money supply between 2013 and 2014.
On the following graph, use the grey point (star symbol) to indicate the equilibrium interest rate and quantity of money that would result from this
lack of intervention.
NOMINAL INTEREST RATE (Percent)
6.25
6.00
5.75
5.50
5.25
5.00
4.75
4.50
4.25
0.9
1.0
1.1
1.2
1.3
1.4
QUANTITY OF MONEY (Trillions of dollars)
Because
Money Supply
1.5
B
MD
MD
2013
Suppose the Fed wants to keep 2014 interest rates at their 2013 level.
2014
☆
No Intervention
New MS Curve
With Intervention
5.50%
5.75%
6.00%
?
A-rapidly increasing the money supply causes hyperinflati
investment responds to changes in the interest rate
markets prefer low inflation to stable interest rates
On the previous graph, place the green…
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- In the following table, fill in the column labeled Value of Money. Price Level (P) Value of Money (1/P) 0.80 1.00 1.33 2.00 Now consider the relationship between the quantity of money that people demand and the price level. The higher the price level, the required to complete transactions, and the money people will want to hold in the form of currency or demand deposits. Assume that the Federal Reserve initially fixes the quantity of money supplied at $2.5 billion. VALUE OF MONEY 2.00 Use the orange line (square symbol) to plot the initial money supply (MS₁) set by the Fed. Then, referring to the previous table, use the blue connected points (circle symbol) to graph the money demand curve. 1.79 1.50 1.25 1.00 0.50 Quantity of Money Demanded (Billions of dollars) 2.0 D D 1 2.5 4.0 8.0 2 4 5 QUANTITY OF MONEY (Billions of dollars) According to your graph, the equilibrium value of money is MS, Money Demand therefore the equilibrium price level is Now, suppose that the Fed increases the…arrow_forwardExplain whether each of the following events increases or decreases the money supply. a) MCB bank repays a loan it had previously taken from state bank of pakistan b) after a rash of pickpocketing , people decide to hold less currency. c) fearful of bank runs , bankers decide to hold more excess reservesarrow_forwardSuppose the Federal Reserve conducts an open market purchase from a bank for $300 million. Assuming the required reserve ratio is 10%, what would be the effect on the money supply in each of the following situations? If there are many banks, all of which make loans for the full amount of their excess reserves, the money supply will increase by $ million. (Enter your response as a whole number.)arrow_forward
- In 2019, a Federal reserve publications stated: " The federal reserve can no longer effectively influence the FFR by small changes in the supply of reserves." Is this statement true? 1. No, since the 2007-2009 financial crises, the Fed has fixed the FFR to match the level of reserves held in the banking system. 2. Yes, since the 2007-2009 financial crises, banks have held substantial excess reserves so small changes in reserves by the Fed do not significantly influence the FFR 3. No, the FFR always reacts to the level of reserves, so any changes in reserves by the Fed will impact the FFR 4. Yes, since the 2007-2009 financial crises, banks have stopped holding excess reserves altogether so small changes in reserves have no impact on the FFRarrow_forwardSuppose you win on a scratch-off lottery ticket and you decide to put all of your $3,500 winnings in the bank. The reserve requirement is 5%. What is the maximum possible increase in the money supply as a result of your bank deposit? maximum increase: $ Which events could cause the increase in the money supply to be less than its potential? Banks choose to loan out all excess reserves. Some loan recipients choose to hold some cash instead of depositing all of it in banks. Banks decide to keep some excess reserves on hand. All money loaned out is deposited back into the banking system.arrow_forwardThe 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_forward
- 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 3.5% and a quantity of money equal to $0.4 trillion, as indicated by the grey star.arrow_forwardFor the last time, consider an economy described by the following information: Demand deposits total $200,000 Cash in bank vaults totals $50,000 • The public holds cash of $36,000 US government bonds held by banks total $6,000 Banks' deposits in the Fed total $22,000 Let's say that one bank in the economy has $60 in excess reserves and that there are enough banks in tesal for the full multiplied money creation process to take place. Calculate the amount (the actual amount, not the maximum) that the entire banking system -- all banks working together -- will create in new money, using these ER as your starting point. Carefully follow all numeric directions, including those related to rounding.arrow_forwardSuppose the money market for some hypothetical economy is given by the following graph, which plots the money demand and money supply curves. Assume the central bank in this economy (the Fed) fixes the quantity of money supplied. Suppose the price level increases from 90 to 105. Shift the appropriate curve on the graph to show the impact of an increase in the overall price level on the market for money. Following the price level increase, the quantity of money demanded at the initial interest rate of 6% will be (greater/less)than the quantity of money supplied by the Fed at this interest rate. As a result, individuals will attempt to (increase/decrease) their money holdings. In order to do so, they will (buy/sell) bonds and other interest-bearing assets, and bond issuers will realize that they (have to offer higher/can offer lower) interest rates until equilibrium is restored in the money market at an interest rate of ______%. The following graph plots the…arrow_forward
- Describe in detail the differences between the three hypothetical countries money supplies, money multipliers, and likely impacts on each economy. Explain how each of the following situations changes the quantity of money (money supply) in the economy, based on its computed change in money supply. The Federal Reserve System buys bonds. The Federal Reserve System auctions credit. The Federal Reserve System raises the discount rate. The Federal Reserve System raises the reserve requirement.arrow_forwardEquilibrium and disequilibrium in the money market The following diagram represents the money market in the United States, which is currently in equilibrium, as indicated by the grey star. Suppose the Federal Reserve (the Fed) announces that it is raising its target interest rate by 25 basis points, or 0.25%. It would achieve this by decrease increase the money supply money demand . Use the green line (triangle symbols) on the preceding graph to illustrate the effects of this policy. Place the black point (plus symbol) on the graph to indicate the new equilibrium interest rate and quantity of money. The sequence of events that results in a new equilibrium interest rate, after the Fed makes the change you selected, may be described as follows: Because there is more less money in the financial system, the quantity of money demanded increases decreases , which means that bond issuers can issue bonds at lower interest rates and still…arrow_forwardThe following graph shows an increase in the demand for money from 2023 (MD2023) to 2024 (MD2024) caused by an increase in the price level. The initial equilibrium interest rate in 2023 was Now suppose the Bank of Canada chooses not to alter the money supply between 2023 and 2024. On the following graph, use the grey point (star symbol) to illustrate the equilibrium interest rate and quantity of money that would result from this lack of intervention. NOMINAL INTEREST RATE (Percent) 6.75 6.50 6.25 6.00 5.75 5.50 5.25 5.00 4.75 Money Supply 0.9 1.0 1.1 1.2 1.3 1.4 QUANTITY OF MONEY (Trillions of dollars) 1.5 MD MD, 2024 2023 No Intervention New MS Curve With Intervention (?)arrow_forward
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