# PSU ECON 104 Homework 5 - Points Awarded 98.00 Points...

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Points Awarded98.00Points Missed2.00Percentage98.0%1.Money Supply ProblemYou are hired by the Chair of the Federal Reserve to manage the trading desk at the New York Fed and theChair tells you that he wants you to increase the money supply (M1) by 33.33 percent. They warn you to becareful because in these uncertain times, the money multiplier tends to become very unstable. They suggestthat 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 billionD = 2000 billionER = 0 (not a typo)M = C + DUse the initial conditions IN SCENARIO A above to answer #1-3.What is the MB?A) 600B) 700C) 1060D) 2400E) 3200Feedback:MB = C + RR + ER = 400 + 200 + 0 = 600 = MB
Table for Individual Question FeedbackPoints Earned:3.0/3.0Correct Answer(s):A2.What is the money multiplier?
C) 4D) 3Feedback:MM = [(C/D + 1) / (C/D + RR/D + ER/D)] = [(.20 + 1) / (.20 + .10] = 4 = MMTable for Individual Question FeedbackPoints Earned:3.0/3.0
3.What is the money supply? Use mm x MB to calculate this.
Table for Individual Question FeedbackPoints 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, thebanks 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?
Table for Individual Question FeedbackPoints Earned:3.0/3.0Correct Answer(s):B5.What is the money multiplier?Round to 3 decimal places.A) 3.429B) 4.333C) 4.012D) 5.413Feedback:MM = [(C/D + 1) / (C/D + RR/D + ER/D)] = [(.20 + 1) / (.20 + .10 + .05] = 3.42857 = MM
Table for Individual Question FeedbackPoints Earned:3.0/3.0Correct Answer(s):A6.What is the money supply? Use mm x MB to calculate this andRound to the nearest whole number.
Table for Individual Question FeedbackPoints 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 you injected \$100 billion in thesystembut it didn’t work because banks are holding on to the ER (the banks never loaned them out,they hoarded them instead).Scenario C:Nowyou get some calls from bankers and you learn that there has been some ‘internalsubstitution’ within the M1 money supply. In particular, households prefer tohold more currency relative todeposits, 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?
Table for Individual Question FeedbackPoints Earned:3.0/3.0Correct Answer(s):C

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Correct Answer, Federal Reserve System, Individual Question, Federal Reserve Banks