PRINCIPLES OF MACROECON.(LL)-W/ACCESS
7th Edition
ISBN: 9781260270907
Author: Frank
Publisher: MCG
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Chapter 10, Problem 3RQ
To determine
Determine how the Fed will reduce the money supply of U.S economy using the open market operations.
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stock shares: $46
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PRINCIPLES OF MACROECON.(LL)-W/ACCESS
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- Initially, the Republic of Gorgonzola has no commercial banking system. To make trading easier and eliminate the need for barter, the government directs the central bank of Gorgonzola to put into circulation 4,000,000 identical paper notes, called guilders. The central bank prints the guilders and distributes them to the people. At this point the Gorgonzolan money supply is 4,000,000 million guilders.In order to keep the money safe, some Gorgonzolan entrepreneurs set up a system of commercial banks. When people need to make a payment, they can either withdraw their guilders or write a check on their account. Checks give the banks permission to transfer guilders from the account of the person paying by check to the account of the person to whom the check is made out. With a system of payments based on checks, the paper guilders need never leave the banking system, although they flow from one bank to another as a depositor of one bank makes a payment to a depositor in another bank.…arrow_forwarduppose an individual deposits $4,000 into her chequing account, which eventually leads banks to increase cash reserves of $4,000 and initiates $46,000 in additional loans. The target reserve ratio is [blank1]%. Suppose an individual makes a new deposit of $15,250. If the targeted reserve ratio is 12.5%, calculate the value of new loans generated in the economy.arrow_forwardAccording to your graph, the equilibrium value of money is (0.25, 0.50, 0.75, 1.00) therefore the equilibrium price level is (1.00, 1.33, 2.00, 4.00). Now, suppose that the Fed reduces the money supply from the initial level of $4 billion to $2.5 billion. In order to reduce the money supply, the Fed can use open market operations to (sell bonds to – buy bonds from) the public. Use the purple line (diamond symbol) to plot the new money supply (MS2). Immediately after the Fed changes the money supply from its initial equilibrium level, the quantity of money supplied is (greater – less) than the quantity of money demanded at the initial equilibrium. This contraction in the money supply will (increase – reduce) people’s demand for goods and services. In the long run, since the economy’s ability to produce goods and services has not changed, the prices of goods and services will (rise – fall) and value of money will (rise – fall)arrow_forward
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