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Microsoft Word - Solution-Chapter-8

# Microsoft Word - Solution-Chapter-8 - Chapter 25 1 In the...

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C h a p t e r 2 5 1. In the United States today, money includes which of the following items? a. Federal Reserve bank notes in Citibank’s cash machines Money includes currency outside the banks. Currency inside cash machines is not money. b. Your Visa card The Visa card is not money. c. Coins inside a vending machine The coins inside a vending machine are money. d. U.S. dollar bills in your wallet The dollar bills inside your wallet are money. e. The check you have just written to pay for your rent The check is not money. f. The loan you took out last August to pay for your school fees The loan is not money. 2. The commercial banks in Zap have Reserves \$250 million Loans \$1,000 million Deposits \$2,000 million Total assets \$2,500 million If the banks have n o excess reserves, calculate the banks’ desired reserve ratio. The banks’ desired reserves equal their reserves, \$250 million, divided by their deposits, \$2,000 million, which is 12.5 percent. 3. You are given the following information about the economy of Nocoin:Thebankshavedepositsof\$300billion.Theirreserves are \$15 billion, two thirds of which is in deposits with the central bank. Households and firms hold \$30 billion in bank notes. There are no coins! Calculate a. The monetary base. The monetary base is \$45 billion. The monetary base is the sum of thecentral bank’snotes,banks’depositsatthecentralbank, and coins held by households, firms, and banks. There are \$30 billion in notes held by households and firms, banks’ deposits atthecentralbankare\$10billion(2/3of\$15billion),thebanks hold other reserves of \$5 billion (which are notes), and there are no coins. The monetary base is \$45 billion. b. The quantity of money. The quantity of money is \$330 billion. In Nocoin, deposits are \$300billionandcurrencyis\$30billion, sothequantityof money is \$330 billion. c. The banks’ reserve ratio (as a percentage). The banks’ reserve ratio is 5 percent. The banks’ reserve ratio is the percent of deposits that is held as reserves. In Nocoin, deposits are \$300 billion and reserves are \$15 billion, so the reserve ratio equals (\$15 billion/\$300 billion) 100, which is 5 percent.

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M O N E Y , T H E P R I C E L E V E L , A N D I N F L A T IO N 1 2 4 d. The currency drain ratio (as a percentage). The currency drain is 10 percent. The currency drain is the ratio of currency to deposits. In Nocoin, currency is \$30 billion and deposits are \$300 billion, so the currency drain equals (\$30 billion/\$300 billion) 100, which is 10 percent. 4. [Study the Mathematical Note on pp. 608-609 (206-207 in Macroeconomics) to workthisproblem.]In problem3, thebanks have no excess reserves. Suppose that the Bank of Nocoin, the central bank, increases bank reserves by \$0.5 billion. a. What happens to the quantity of money? The quantity of money increases by \$3.67 billion. The quantity of money increases by the change in the monetary base multiplied by the money multiplier. The money multiplier is 7.33 (see part c), so when the monetary base increases by \$0.5 billion, the quantity of money increases by \$3.67 billion.
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