11. Assume the following
information about the banking system

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Question: 11. Assume the following information about the banking system Quantities in billions of dollars&…
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Quantities in billions of
dollars                       

                             

Currency (C) =
$762                               

Excess Reserves ( R ) =
$66

Required reserves (RR0 =
$0                                 

Checking deposits (D ) =
$604           

Give the numerical answer to
the following questions:

a. What is the size of the
monetary base?

b. What is the money supply
in the economy?

c. What is the size of the
money multiplier?

Assume that the currency to
deposit ratio rises to 1.5

a. Compute the effect of the
change in currency to deposit ratio on the money multiplier,
m

b. What will happen to the
money supply given the monetary base?

c. If the Fed wants to keep
the money supply at the initial level, how must the Fed adjust the
monetary base? Explain

d. What open market
operations should the Fed conduct to adjust the monetary base to
keep the money supply at the initial level?

e. By how much must the Fed
adjust the monetary base to keep the money supply at its initial
level?

f. How much must the Fed buy
or sell in the government bonds to keep the money supply at the
initial level?

12. Assume that the MB =
$828, Money supply = $1366 and thel money multiplier

m= 1.650. The non-bank public
shifts $40B currency to deposits and the Fed wishes to keep the
money supply at the level of $1366 B. Explain verbally and show
numerically the following:

a. What will happen to the
level of reserves in the banking system?

b. What will happen to the
monetary base?

c. What will happen to the
money multiplier?

d. By how much will the money
supply increase or decrease as the result of the non-bank public
action?

e. How should the Fed respond
given his goal of keeping the money supply at the initial level?
Explain

f. What open market
operations should the Fed conduct to adjust the monetary base and
keep the money supply constant? Explain

g. How much in the government
bonds should the Fed buy or sell to keep the money supply
constant?

13. Use demand and supply
graphs for the federal funds market (market for reserves) to
analyze the following situations. Be sure that your graphs clearly
show changes in the equilibrium federal funds rate and the
equilibrium level of reserves and the Fed action to keep the
equilibrium federal fund rate unchanged ( (at the
target)

a. Suppose that banks
decrease their demand for reserves

b. Suppose that the Fed
decides to decrease the required reserve ratio.

c. Suppose that banks
increase their demand for reserves

d. Suppose the Fed decreases
the discount rate

e. Suppose that the Fed
decreases the interest rate on reserves

14. Use the supply and demand
analysis of the market for reserves to explain and illustrate the
effect of the following events on the federal funds rate and the
Fed action to keep the equilibrium interest rate its target. Assume
that initial equilibrium federal funds rate is 4 percent

a. There is a switch from
currency into deposits, everything else held constant.

b. The Fed decreases discount
rate by 50 basis points, everything else held constant

c. Public decided to hold
more currency, everything held constant

d. The Fed started to pay
interest rate on excess reserves, everything held
constant

e. The Fed purchases through
the open market $3 billion of Treasury bonds.

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