Points Awarded94.00Points Missed6.00Percentage94.0%1.Money Supply ProblemYou are hired by the Chair of the Federal Reserve to manage the trading desk at the New York Fed and the Chair tells you that he wants you to increase the money supply (M1) by 33 percent. They warn you to be careful because in these uncertain times, the money multiplier tends to become very unstable. They suggest that you stay ‘closely connected’ with the banking sector and then gives you a list of phone numbers to do so. Note that in this problem we are targeting the growth rate of M1.Reserve Market Initial Conditions (Scenario A)rr/D= .10C = 400 bD = 2000 bER = 0 (not a typo)M = C + DUse the initial conditions IN SCENARIO A above to answer #1-3.What is the MB?A) B) C) D) 60070010602400
E) Feedback: MB = C + RR + ER = 400 + 200 + 0 = 600 = MB3200Points Earned:3.0/3.0Correct Answer(s):A2.What is the money multiplier?24.543Points Earned:3.0/3.0Correct Answer(s):C
3.What is the money supply? Use mm x MB to calculate this.A) 600B) 700C) 1060D) 2400E) 3200Feedback: M = 4 x 600 = 2400 = M = C + DPoints Earned:3.0/3.0Correct Answer(s):D4.Scenario B:So you decide to inject $100 billion in reserves via open market purchases with phone in hand. Recall, the Chair said to watch that multiplier and so you start making some calls. Just as you suspected, the banks aren’t making any loans, that is, they are sitting on all $100 billion in excess reserves.
Given these new conditions from SCENERIO B, answer #4-6.What is the MB?600700106024003200Points Earned:3.0/3.0Correct Answer(s):B5.What is the money multiplier? Round to 3 decimal places.3.429
4.0125.413Points Earned:3.0/3.0Correct Answer(s):A6.What is the money supply? Use mm x MB to calculate this and Round to the nearest whole number.A) 600B) 700C) 1060D) 2400E) 3200
Feedback: M = 3.429 x 700 = 2400.3 = M = C + DPoints Earned:3.0/3.0Correct Answer(s):D7.Now the Chair calls and asks you how things are going and you tell him/her that youinjected $100 billion in the system but it didn’t work because banks are holding on to the ER (the banks never loaned them out, they hoarded them instead).Scenario C: Now you get some calls from bankers and you learn that there has been some ‘internal substitution’ within the M1 money supply. In particular, households prefer to hold more currency relative to deposits, i.e., the currency to deposit ratio rises. The new numbers are as follows:rr/D= .10C = 800 bD = 1600 bER =100 bUse the new conditions from SCENARIO C to answer #7-9.What is the MB?A) B) 600700C) 1060D)
2400E) 3200Feedback: MB = C + RR + ER = 800 + 160 + 100 = 1060 = MBPoints Earned:3.0/3.0Correct Answer(s):C
