QUESTION 2 Suppose that for every open-market operation in the amount of $1, money supply increases by $3, i.e., an open-market purchase of $1 will increase money supply by $3 and an open-market sale of $1 will reduce money supply by $3. This means that money multiplier is fixed and is equal to 3. The Fed's balance sheet is Federal Reserve Bank Assets Liabilities $ 900 Currency held by nonbank public 100 Vault cash held by banks Reserve deposits $1000 Total liabilities Securities $ 700 100 Gold 200 $1000 Total assets and the commercial banks' balance sheet is Consolidated Balance Sheet of Banks Assets Liabilities $ 100 Deposits $3000 Vault cash Reserve deposits Loans Total assets 200 2700 $3000 Total liabilities $3000 If the Fed wants to increase money supply by 15%, then it has to buy government bonds in the amount of Note: Type in your answer rounded to two decimal places, i.e., your answer must be of the form "999.99". I will not be able to fix correct answers that were entered incorrectly, such as "999.999" or "999,99" or "999". In case the last digit in the correct answer is zero, e.g., "999.90" or "999.00", Blackboard may automatically delete it and you should not do anything about it. In case of percentages, do not type in the percentage symbol "%". If your answer is a negative number, type a dash in front of your answer, i.e, "-999.99". 185.00
QUESTION 2 Suppose that for every open-market operation in the amount of $1, money supply increases by $3, i.e., an open-market purchase of $1 will increase money supply by $3 and an open-market sale of $1 will reduce money supply by $3. This means that money multiplier is fixed and is equal to 3. The Fed's balance sheet is Federal Reserve Bank Assets Liabilities $ 900 Currency held by nonbank public 100 Vault cash held by banks Reserve deposits $1000 Total liabilities Securities $ 700 100 Gold 200 $1000 Total assets and the commercial banks' balance sheet is Consolidated Balance Sheet of Banks Assets Liabilities $ 100 Deposits $3000 Vault cash Reserve deposits Loans Total assets 200 2700 $3000 Total liabilities $3000 If the Fed wants to increase money supply by 15%, then it has to buy government bonds in the amount of Note: Type in your answer rounded to two decimal places, i.e., your answer must be of the form "999.99". I will not be able to fix correct answers that were entered incorrectly, such as "999.999" or "999,99" or "999". In case the last digit in the correct answer is zero, e.g., "999.90" or "999.00", Blackboard may automatically delete it and you should not do anything about it. In case of percentages, do not type in the percentage symbol "%". If your answer is a negative number, type a dash in front of your answer, i.e, "-999.99". 185.00
Chapter16: Monetary Policy
Section: Chapter Questions
Problem 7SQ
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Question
Transcribed Image Text:QUESTION 2
Suppose that for every open-market operation in the amount of $1, money supply increases by $3, i.e., an open-market purchase of $1 will increase money supply by $3 and an open-market sale of $1 will reduce money supply by $3.
This means that money multiplier is fixed and is equal to 3. The Fed's balance sheet is
Federal Reserve Bank
Assets
Liabilities
$ 900 Currency held by nonbank public
Vault cash held by banks
Reserve deposits
Total liabilities
Securities
Gold
$ 700
100
100
200
$1000
Total assets
$1000
and the commercial banks' balance sheet is
Consolidated Balance Sheet of Banks
Assets
Liabilities
$ 100
Deposits
$3000
Vault cash
Reserve deposits
200
Loans
2700
Total assets
$3000
Total liabilities
$3000
If the Fed wants to increase money supply by 15%, then it has to buy government bonds in the amount of
Note: Type in your answer rounded to two decimal places, i.e., your answer must be of the form "999.99". I will not be able to fix correct answers that were entered incorrectly, such as "999.999" or “999,99" or “999". In case the last digit
in the correct answer is zero, e.g., "999.90" or “999.00", Blackboard may automatically delete it and you should not do anything about it. In case of percentages, do not type in the percentage symbol “%". If your answer is a negative
number, type a dash in front of your answer, i.e, “-999.99".
185.00
Transcribed Image Text:QUESTION 3
Consider the economy described in question 2. If the Fed sells $50 of government bonds than money supply will
O A. increase by 1.36%
B. decrease by 1.36%
C. increase by 4.05%
D. decrease by 4.05%
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