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Your boss, the Chair of the Central Bank of Zargadee, seeks your advice about monetary policy. For part B below, B) The central bank decreases the reserve requirement to 5% i) Conceptually explain the effect of the policy on the money supply. ii) Calculate the change in M1 given our assumptions. iii) Construct the new balance sheet of the consolidated banking system of Zargadee under the new policy. iv) When the money supply changes, list a chain of events to make a prediction using the Aggregate Demand / Aggregate Supply framework about the change in real output in the short run.

Your boss, the Chair of the Central Bank of Zargadee, seeks your advice about monetary policy. For part B below, B) The central bank decreases the reserve requirement to 5% i) Conceptually explain the effect of the policy on the money supply. ii) Calculate the change in M1 given our assumptions. iii) Construct the new balance sheet of the consolidated banking system of Zargadee under the new policy. iv) When the money supply changes, list a chain of events to make a prediction using the Aggregate Demand / Aggregate Supply framework about the change in real output in the short run.

ECON MACRO
ECON MACRO
5th Edition
ISBN:9781337000529
Author:William A. McEachern
Publisher:William A. McEachern
Chapter14: Banking And The Money Supply
Section: Chapter Questions
Problem 3.4P
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Assets Reserves Cash in Vault Liabilities Deposits Borrowing from CBZ 1200 50 200 Deposits at CBZ Total Reserves 70 120 Bonds 370 Loans 910 Total Assets 1400 Total Liabilities 1400 Assume that 1) households hold no currency and 2) banks hold no excess reserves. The current reserve requirement is 10%. The Central Bank of Zargadee uses three traditional tools to perform monetary policy in an economy that is reserve constrained.
Transcribed Image Text:Assets Reserves Cash in Vault Liabilities Deposits Borrowing from CBZ 1200 50 200 Deposits at CBZ Total Reserves 70 120 Bonds 370 Loans 910 Total Assets 1400 Total Liabilities 1400 Assume that 1) households hold no currency and 2) banks hold no excess reserves. The current reserve requirement is 10%. The Central Bank of Zargadee uses three traditional tools to perform monetary policy in an economy that is reserve constrained.
Your boss, the Chair of the Central Bank of Zargadee, seeks your advice about monetary policy. For part B below, B) The central bank decreases the reserve requirement to 5% i) Conceptually explain the effect of the policy on the money supply. ii) Calculate the change in M1 given our assumptions. iii) Construct the new balance sheet of the consolidated banking system of Zargadee under the new policy. iv) When the money supply changes, list a chain of events to make a prediction using the Aggregate Demand / Aggregate Supply framework about the change in real output in the short run. Then, using the Aggregate Demand / Aggregate Supply framework (use a graph), determine v) the short run effect on the price level and real output and vi) the long run effect on the price level and real output and vii) the total effect of the policy on the price level and real output.
Transcribed Image Text:Your boss, the Chair of the Central Bank of Zargadee, seeks your advice about monetary policy. For part B below, B) The central bank decreases the reserve requirement to 5% i) Conceptually explain the effect of the policy on the money supply. ii) Calculate the change in M1 given our assumptions. iii) Construct the new balance sheet of the consolidated banking system of Zargadee under the new policy. iv) When the money supply changes, list a chain of events to make a prediction using the Aggregate Demand / Aggregate Supply framework about the change in real output in the short run. Then, using the Aggregate Demand / Aggregate Supply framework (use a graph), determine v) the short run effect on the price level and real output and vi) the long run effect on the price level and real output and vii) the total effect of the policy on the price level and real output.
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