Homework 5 part 1 - 1 Money Supply Problem You are hired by...

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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 33.33 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 billion D = 2000 billion 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 Table for Individual Question Feedback Points Earned: 3.0/3.0 Correct Answer(s): A 2. What is the money multiplier?
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Table for Individual Question Feedback 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 Table for Individual Question Feedback 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. Given these new conditions from SCENERIO B, answer #4-6. What is the MB? A) 600 B) 700
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C) 1060 D) 2400 E) 3200 Feedback: MB = C + RR + ER = 400 + 200 + 100 = 700 = MB Table for Individual Question Feedback Points Earned: 3.0/3.0 Correct Answer(s): B
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