Hw2ansm11 - Homework 2 Solutions Principles of Macroeconomics ECO 212 Question 1 a We have multiplier = k 1 k rrr = 1 2 1 1 2 1 4 = 2(1 So $2 in

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Unformatted text preview: Homework 2: Solutions Principles of Macroeconomics: ECO 212 Question 1. a. We have: multiplier = k + 1 k + rrr = 1 2 + 1 1 2 + 1 4 = 2 . (1) So $2 in money supply is created for each $1 of the monetary base. b. We have: M = multiplier · MB = 2 · $600 = $1200 (2) c. For checking deposits, we can use: M = ( k + 1) D (3) $1200 = 3 2 D → D = $800 (4) Thus currency held by the public is: CU = kD = 1 2 $800 = $400 (5) Bank reserves are: BR = rrrD = 1 4 $800 = $200 (6) d. The FED is buying tbills and selling dollars. The dollars enter the economy and add to the monetary base. Hence: Δ M = multiplier · Δ MB = 2 · $100 = $200 (7) So M rises by $200. e. Bank reserves must go up as some of the increase in monetary base is eventually deposited, some of which ends up in reserves. This puts downward pressure on the Fed Funds rate as banks seek to loan out the reserves/deposits. 1 f. We have: M = k + 1 k + rrr MB = 1 2 + 1 1 2 + 0 $600 = $1800 (8) g. We have: multiplier = 1 4 + 1 1 4 + 1 4 = 2...
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This note was uploaded on 01/08/2012 for the course ECO 212 taught by Professor Lorca,m during the Summer '08 term at University of Miami.

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Hw2ansm11 - Homework 2 Solutions Principles of Macroeconomics ECO 212 Question 1 a We have multiplier = k 1 k rrr = 1 2 1 1 2 1 4 = 2(1 So $2 in

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