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Solution to Problem Set 15-16 _ECO100_

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

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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
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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....
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