{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Solution to Problem Set 15-16 _ECO100_

Solution to Problem Set 15-16 _ECO100_ - reserves thus...

Info icon This preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
Prof. Gustavo Indart Department of Economics University of Toronto ECO100Y INTRODUCTION TO ECONOMICS Solution to Problem Set 15-16 1. (a) CU P = CU – CU B = $30 – $5 = $25 (million) Since CU B = RE – D CB = $15 – $10 = $5 (million) (b) M = CU P + D = $25 + $300 = $325 (million) (c) In the absence of any cash drain from the banking system, mm = 1/v and v = RE/D = 15/300 = 0.05, and then mm = 1/0.05 = 20. (d) Assets: D CB = $10 Liabilities: D = $300 Loans = $285 CU B = $5 2. If the Central Bank buys $1 million in government bonds from the public, the stock of high-powered money (or monetary base) increases by this amount. Therefore, since mm = 20, deposits will increase by $20 million. Assuming no cash drain from the banking system, the money supply will increase by this amount. The money supply increases by more than the value of the purchase of government bonds from the public because the chartered banks will try to eliminate any excess
Image of page 1
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: reserves, thus creating new money in the process. 3. (a) mm = 1/v and v = 0.1. Therefore, mm = 1/0.1 = 10. (b) Since there is no cash drain from the banking system, ∆ RE = ∆ D CB = $1 million. Accordingly, ∆ M = mm ∆ RE = 10($1 million) = $10 million. (c) Since there is no cash drain from the banking system, ∆ RE = ∆ D CB = –$1 million. Accordingly, ∆ M = mm ∆ RE = 10(–$1 million) = –$10 million. (d) Since the government borrows $1 million from the public (and thus the reserves of the chartered bank decrease by this amount) and then spends it (and thus the reserves of the chartered bank increase by this amount), there is no net change in the reserves of the chartered bank. Therefore, there will be no change in the money supply either....
View Full Document

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern