# Homework_5 - Points Awarded Points Missed Percentage 94.00...

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Points Awarded 94.00 Points Missed 6.00 Percentage 94.0% 1. Money Supply Problem You 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= .10 C = 400 b D = 2000 b ER = 0 (not a typo) M = C + D Use the initial conditions IN SCENARIO A above to answer #1-3. What is the MB? A) 600 B) 700 C) 1060 D) 2400

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E) 3200 Feedback: MB = C + RR + ER = 400 + 200 + 0 = 600 = MB Points Earned: 3.0/3.0 Correct Answer(s): A 2. What is the money multiplier? 2 4.5 4 3 Points Earned: 3.0/3.0 Correct Answer(s): C
3. What is the money supply? Use mm x MB to calculate this. A) 600 B) 700 C) 1060 D) 2400 E) 3200 Feedback: M = 4 x 600 = 2400 = M = C + D Points Earned: 3.0/3.0 Correct Answer(s): D 4. 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.

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Given these new conditions from SCENERIO B, answer #4-6. What is the MB? A) 600 B) 700 C) 1060 D) 2400 E) 3200 Feedback: MB = C + RR + ER = 400 + 200 + 100 = 700 = MB Points Earned: 3.0/3.0 Correct Answer(s): B 5. What is the money multiplier? Round to 3 decimal places. 3.429
4.012 5.413 Points Earned: 3.0/3.0 Correct Answer(s): A 6. What is the money supply? Use mm x MB to calculate this and Round to the nearest whole number . A) 600 B) 700 C) 1060 D) 2400 E) 3200

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Feedback: M = 3.429 x 700 = 2400.3 = M = C + D Points Earned: 3.0/3.0 Correct Answer(s): D 7. Now the Chair calls and asks you how things are going and you tell him/her that you injected \$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= .10 C = 800 b D = 1600 b ER =100 b Use the new conditions from SCENARIO C to answer #7-9. What is the MB? 600 700 1060
3200 Points Earned: 3.0/3.0 Correct Answer(s): C

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