Homework_5 - Points Awarded Points Missed Percentage 94.00...

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

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?
Points Earned: 3.0/3.0
Correct Answer(s): C

3.
What is the money supply? Use mm x MB to calculate this.
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.

Given these new conditions from SCENERIO B, answer #4-6.
What is the MB?
Points Earned: 3.0/3.0
Correct Answer(s): B
5.
What is the money multiplier? Round to 3 decimal places.
A)
3.429
B)

4.333
C)
4.012
D)
5.413
Feedback: MM = [(C/D + 1) / (C/D + RR/D + ER/D)] = [(.20 + 1) / (.20 + .10 + .05]
= 3.42857 = MM
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 .

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?

2400
E)
3200
Feedback: MB = C + RR + ER = 800 + 160 + 100 = 1060 = MB
Points Earned: 3.0/3.0