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Unformatted text preview: Assume that the required reserve ratio is 10% and there is no currency drain. Table 1: How banks make money Deposit Amount Excess Reserves Resulting Loan Money Supply First Deposit Second Deposit Third Deposit And so on … … … … 3) Lets say that: currency in circulation = $3 million reserves held by banks = $1 million bank deposits = $10 million What is the money supply? What is the monetary base? 4) Assume that the money multiplier is 1.9. Now lets say that that the Fed buys $200 million in Treasury Bills from a commercial bank. What is the change in the money supply? Now lets assume that the Fed sells $150 million in Treasury Bills to a commercial bank. What is the change in the money supply?...
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- Spring '08
- Monetary Policy, Cheque, Fractional-reserve banking, treasury bills