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3. Suppose that banks aim to hold reserves equal to 8 per cent of deposits. Also suppose that desired holdings of currency by the non-bank public are 2 per cent of deposits. Calculate the following using the money multiplier model set out in the lectures: a. The simple deposit multiplier b. The money multiplier c. If the central bank supplies an additional $50m of bank reserves, what will be the effect on the total money supply?

3. Suppose that banks aim to hold reserves equal to 8 per cent of deposits. Also suppose that desired holdings of currency by the non-bank public are 2 per cent of deposits. Calculate the following using the money multiplier model set out in the lectures: a. The simple deposit multiplier b. The money multiplier c. If the central bank supplies an additional $50m of bank reserves, what will be the effect on the total money supply?

Principles of Macroeconomics (MindTap Course List)
Principles of Macroeconomics (MindTap Course List)
7th Edition
ISBN:9781285165912
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter16: The Monetary System
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1. Suppose the central bank decides to lend $2million to a particular bank (Kangaroo Bank) on the condition that Kangaroo Bank must make an additional $2million loan to one of its customers. a. Show the effect this has on the balance sheets of the central bank and Kangaroo Bank. b. If the customer uses those funds to buy a house from a person who banks with Koala Bank, show the effects this will have on the balance sheets of Kangaroo and Koala Bank. 2. Suppose that, as a result of increased use of electronic payments, banks no longer need to hold as much vault cash. Banks decide to reduce their vault cash holdings by $250million. a. Show the effects this would have on the balance sheets of commercial banks and the central bank. b. If, at the same time, depositors decide to reduce their cash holdings by $50million by depositing that amount with their banks, show the combined effect of these decisions on the balance sheets of commercial banks. 3. Suppose that banks aim to hold reserves equal to 8 per cent of deposits. Also suppose that desired holdings of currency by the non-bank public are 2 per cent of deposits. Calculate the following using the money multiplier model set out in the lectures: a. The simple deposit multiplier b. The money multiplier c. If the central bank supplies an additional $50m of bank reserves, what will be the effect on the total money supply? d. How might a financial panic affect the money multiplier and the deposit multiplier? e. How would you expect the central bank to respond in that situation?
Transcribed Image Text:1. Suppose the central bank decides to lend $2million to a particular bank (Kangaroo Bank) on the condition that Kangaroo Bank must make an additional $2million loan to one of its customers. a. Show the effect this has on the balance sheets of the central bank and Kangaroo Bank. b. If the customer uses those funds to buy a house from a person who banks with Koala Bank, show the effects this will have on the balance sheets of Kangaroo and Koala Bank. 2. Suppose that, as a result of increased use of electronic payments, banks no longer need to hold as much vault cash. Banks decide to reduce their vault cash holdings by $250million. a. Show the effects this would have on the balance sheets of commercial banks and the central bank. b. If, at the same time, depositors decide to reduce their cash holdings by $50million by depositing that amount with their banks, show the combined effect of these decisions on the balance sheets of commercial banks. 3. Suppose that banks aim to hold reserves equal to 8 per cent of deposits. Also suppose that desired holdings of currency by the non-bank public are 2 per cent of deposits. Calculate the following using the money multiplier model set out in the lectures: a. The simple deposit multiplier b. The money multiplier c. If the central bank supplies an additional $50m of bank reserves, what will be the effect on the total money supply? d. How might a financial panic affect the money multiplier and the deposit multiplier? e. How would you expect the central bank to respond in that situation?
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