2011 HW 11 Fall

2011 HW 11 Fall - Seongjae Lee ManEc 453 Problem Set #11...

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Unformatted text preview: Seongjae Lee ManEc 453 Problem Set #11 Due: December 5, 2011 1. Define the money multiplier (m) : ratio of commercial bank money to central bank money under a fractional-reserve banking system. it measures the maximum amount of commercial bank money that can be created by a given 2. "If reserve requirments were set at zero for checkable deposits, the amount of multiple deposit creation would go on indefinitely". True. Multiple deposit creation would go on indefinitely theoretically. 3. During the Great Depression, the excess reserve ratio rose dramatically. What do you think happened to the money supply? Prior to FDIC, there was no publicly provided insurance for bank deposits. With the Great Depression, many bank loans failed. People worried that their bank did not have enough in reserves to cover all deposits. They rushed to their bank to withdraw their money while their was still something left in reserve. This sparked a series of bank panics where even financially stable banks were affected. These bank panics directly led to a reduction in the money supply. Fears of bank insolvency caused c to rise.were affected....
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