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m_quiz6_2010_ans

m_quiz6_2010_ans - QUIZ 6 Macro Winter 2010 Name Section...

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QUIZ 6: Macro – Winter 2010 Name: ______________________ Section Registered Campus Evening Question 1 (10 points) In this question, we will explore the link between the banking system and the aggregate money supply in the economy. Given the assumptions below, you should answer the subsequent parts to this question. All answers are numbers. Lastly, throughout the problem, assume the bank can adjust total loans (TL) freely (i.e., they can make new loans and call in old loans at will). This means total loans need not be fixed! Put your answer in the box . No work need be shown. All answers will be either awarded full credit (3 or 4 points) or no credit (0 points). There is little (if any) math that needs to be done to answer these questions. Most of the questions can be answered with simple intuition or simple arithmetic (adding, multiplying, etc.). Calculators are allowed (but you shouldn’t need them). Baseline assumptions : 1. The required reserve ratio ( m) equals 8.0%. 2. Banks only hold required reserves ( m* = m ). 3. No one in the economy holds cash outside the banking system ( TC = 0). 4. Total deposits in the entire banking system equals $1.25 trillion ( TD = $1.25 trillion). a. Given the baseline assumptions, what is the monetary base ( Base ) in this economy? (3 points) Monetary Base = TR + TC (money in the banks plus money in our pockets) TR = m * TD = 0.08 * 1.25 trillion = 0.1 trillion ($100 billion) TC = 0 (by assumption) Base = $0.1 trillion (or $100 billion) b.
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