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Unformatted text preview: 1. (a) The increase in banks’ reserve-deposit ratio reduces the money multiplier, causing the money supply to decline. (b)The increased holding of cash raises the currency-deposit ratio, reducing the money multiplier and causing the money supply to decline. (c) The sale of gold to the public has the same effect as an open-market sale of government securities—it reduces the monetary base, thus causing the money supply to decline. (d)If the Fed pays interest on reserves, it reduces the opportunity cost of holding reserves. Banks are likely to increase their reserve-deposit ratio, thus reducing the money multiplier, causing the money supply to decline. (e) The availability of ATMs means people hold less cash and more deposits, reducing the currency-deposit ratio. This causes the money multiplier to increase, which causes the money supply to increase. (f) When the Fed monetizes the government debt, the monetary base increases, so the money supply increases. (g)When the Fed sells securities in exchange for yen, there is no change in the U.S. monetary base or in the U.S. money supply. The Fed has simply changed the composition of its assets. 2. L = 0.2 Y – 500 i = 0.2 Y – 500 r – 500 π . With Y = 1000, L = 200 – 500 r – 500 π . (a) When r = 0.04, equating real money supply to money demand gives: M / P = L = 200 – (500 × 0.04) – 500 π = 180 – 500 π . Real seignorage revenue R = π M / P = 180 π – 500 π 2 . The following table shows seignorage revenue (....
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This note was uploaded on 09/03/2009 for the course ECON 3140 taught by Professor Mbiekop during the Spring '07 term at Cornell.
- Spring '07