Answered: Q. 2 Consider a small economy. Suppose…

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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Q. 2 Consider a small economy. Suppose that currency in circulation is $200 million, the amount of chequable deposits is $1000 million, and excess reserve holding is $60 million and desired reserve holding ratio is 10%. a) How much money does the economy have? b) How much is its monetary base? c) How much is its money multiplier? 1.5P 1.5P 2P d) If the central bank (CB) conducts an open market purchase of $50 million with an LVTS participant and hence its monetary base (MB) changes accordingly, how much money created in its 1st step, 2nd step and 3rd step of the money creation process for the MB change? And, how much total money created in the end for the MB change?

Definition Definition Capital reserves held by banks or financial institutions over and above the reserves that are required to be maintained by the regulator toward its liabilities and for internal controls. For commercial banks, excess reserve is the amount over the standard reserve as decided by the central bank. These excess reserve funds are available in the form of cash and cash equivalents.

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