Economics: Principles & Policy
14th Edition
ISBN: 9781337696326
Author: William J. Baumol; Alan S. Blinder; John L. Solow
Publisher: Cengage Learning
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Question
Chapter 29, Problem 5TY
To determine
The effect of a $5 billion increase in bank reserves on different assumptions.
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Students have asked these similar questions
Explain what a $5 billion increase in bank reserves will do to real GDP under the following assumptions:
a.Each $1 billion increase in bank reserves reduces the rate of interest by 0.5 percentage point.
b. Each 1 percentage point decline in interest rates stimulates $30 billion worth of new investment.
c. The expenditure multiplier is two.
d. The aggregate supply curve is so flat that prices do not rise noticeably when demand increases
Suppose the Fed conducts an open market purchase by buying $10 million in Treasury bonds from Acme Bank. Sketch out the balance sheet changes that will occur as Acme converts the bond sale proceeds to new loans. The initial Acme bank balance sheet contains the following information: Assets – reserves 30, bonds 50, and loans 50; Liabilities – deposits 300 and equity 30.
2) All other things being equal, by how much will nominal GDP expand if the central bank increases the money supply by $100 billion, and the velocity of money is 3?
3) Using your answer for #2, please answer the following:
Suppose now that economists expect the velocity of money to increase by 50% as a result of the monetary stimulus. What will be the total increase in nominal GDP?
Suppose that the reserve requirement for checking deposits is 16 percent and that banks do not hold any excess reserves.
If the Fed sells $2 million of government bonds, the economy's reserves (either increase or decrease) by
$______million, and the money supply will (increase or decrease) by $______million.
Now suppose the Fed lowers the reserve requirement to 8 percent, but banks choose to hold another 8 percent of deposits as excess reserves.
True or False: The money multiplier will increase.
False
True or False: As a result, the overall change in the money supply will increase.
True
Chapter 29 Solutions
Economics: Principles & Policy
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Similar questions
- If the money multiplier is 3 and the Fed wants to increase the money supply by $900,000, it could A. buy $300,000 worth of bonds. B. buy $450,000 worth of bonds. C. sell $300,000 worth of bonds. D. sell $450,000 worth of bonds.arrow_forwardSuppose the reserve requirement is initially set at 15%. Instructions: In parts a and c, round your answers to two decimal places. In parts b and d, round your answers to one decimal place. a. At a reserve requirement of 15%, what is the value of the money multiplier? _____ b. If the reserve requirement is 15% and the Fed increases reserves by $30 billion, what is the total increase in the money supply? ____ c. Suppose the Fed raises the reserve requirement to 18%. What is the value of the money multiplier now? ____ d. Assume the reserve requirement is 18%. If the Fed increases reserves by $30 billion, what is the total increase in the money supply? ____ e. Raising the reserve requirement from 15% to 18% ________ (increase or decrease) the money multiplier and ________ (decrease or increase) the money supply.arrow_forwardSuppose that rather than immediately lending out all excess reserves, banks begin holding some excess reserves in response to uncertain economic conditions. Specifically, banks increase the percentage of deposits held as reserves from 10% to 20%. This increase in the reserve ratio causes the multiplier to fall from 10 to 5. Under these conditions, How Many Dollars Worth of government bonds would the Fed would need to Buy or Sell in order to increase the money supply by $100?arrow_forward
- 3 Please Answer the following two Economics Questions: 1. Consider an economy where the ratio of required reserves to bank deposits isr = 0.15, the ratio of currency holdings to deposits is c = 0.2, the ratio of bankexcess reserves to deposits is e = 0.25 and the monetary base is 100. Showhow to calculate the value of the M1 money multiplier predicted by the moneymultiplier model. Explain your answer 2. If monetary velocity is 5, the GDP price deflator equals 2 and real GDP is 250,what is the money supply? Explain your answerarrow_forwardConsider an economy for which the current GDP is $800 billion, “the” multiplier is 3, the income multiplier with respect to the money supply is 4, the money multiplier is 5, the marginal tax rate is 20%, the real interest rate is 3%, the current budget deficit is $30 billion, the long‐run real rate of growth is 2%, the current money supply is $200 billion, the rate of money supply growth is 10%, and financial innovations are decreasing money demand by 1% per year. Marks are given for your explanations, not the final answer. What should be the long‐run rate of inflation? What should be the price of a T‐bill due to mature in six months at its face value of $1,000?arrow_forwardAssume that the required reserve ratio is set at 0.06250.0625 . What is the value of the money (deposit) multiplier? value of money multiplier: How much will the money supply increase if the Fed increases reserve requirements such that banks have to hold $350350 in additional reserves? Assume that banks only hold in reserves what is required. increase in money supply: $ Which statement is a consequence of fractional reserve banking? Fractional reserve banking ensures that private banks make a profit. Control of the required reserve ratio gives the Fed a tool that can be used to implement fiscal policy. Fractional reserve banking implies that private banks have a role in making changes to the money supply.arrow_forward
- Assume that banks lend out all their excess reserves and individuals deposit all their money. If the Required Reserve Ratio is .20, what does the Fed have to do to decrease the supply of money by $300 billion? Select one: a. Sell $60 billion worth of government bonds to commercial banks b. Sell $80 billion worth of government bonds to commercial banks c. Sell $200 billion worth of government bonds to commercial banks d. Buy $100 billion worth of government bonds from commercial banks e. Buy $60 billion worth of government bonds from commercial banksarrow_forwardExplain how each of the following events affects the monetary base, the money multiplier and the money supply, ceteris paribus. a. The Federal Reserve buys bonds in an open market operation (assume that banks keep the same proportion of deposits as reserves and the currency-deposit ratio remains the same b. The Fed increases the interest rate it pays banks for holding reserves (assume that the currency-deposit ratio remains the same). c. The Fed flies a helicopter over 5th Avenue in New York City and drops newly printed $100 bills and people keep that cash rather than depositing it.arrow_forwardAssume that bank deposits are $3,200 billion, the required reserve ratio is 10%, and currency outstanding is $400 billion. Calculate the money multiplier. What can the Fed do to decrease the money supply by $100 million? Assume that banks do not hold excess reservesarrow_forward
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