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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. a. Under our assumptions, what is the money multiplier? Your boss, the Chair of the Central Bank of Zargadee, seeks your advice about monetary policy. For each part (b)-(d) below, 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

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. a. Under our assumptions, what is the money multiplier? Your boss, the Chair of the Central Bank of Zargadee, seeks your advice about monetary policy. For each part (b)-(d) below, 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

Economics: Private and Public Choice (MindTap Course List)
Economics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN:9781305506725
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Chapter13: Money And The Banking System
Section: Chapter Questions
Problem 18CQ
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Pleas answer b parts I -VII

 

Consolidated Balance Sheet of the Entire Economy of Zargadee Assets Liabilities 1200 Reserves Cash in Vault Deposits Borrowing from CBZ 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. a. Under our assumptions, what is the money multiplier? Your boss, the Chair of the Central Bank of Zargadee, seeks your advice about monetary policy. For each part (b)-(d) below, 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. b. The central bank decreases the reserve requirement to 5%. c. The central bank performs an open market operation and buys $10 million in bonds. d. The central bank performs an open market operation and sells $10 million in bonds.
Transcribed Image Text:Consolidated Balance Sheet of the Entire Economy of Zargadee Assets Liabilities 1200 Reserves Cash in Vault Deposits Borrowing from CBZ 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. a. Under our assumptions, what is the money multiplier? Your boss, the Chair of the Central Bank of Zargadee, seeks your advice about monetary policy. For each part (b)-(d) below, 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. b. The central bank decreases the reserve requirement to 5%. c. The central bank performs an open market operation and buys $10 million in bonds. d. The central bank performs an open market operation and sells $10 million in bonds.
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