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hw2m11 - Homework 2 Principles of Macroeconomics ECO 212...

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Homework 2 Principles of Macroeconomics: ECO 212 Due: Tuesday, June 7, 2011 Question 1. Suppose the economy has the following monetary situation: Monetary Base: $600. required reserve ratio: 1/4. currency to deposit ratio: 1/2. a. What is the money multiplier? b. What is the money supply? c. Calculate the currency held by the public, bank reserves, and the total checking de- posits. d. Suppose the FED buys $100 worth of treasury bills. What is the change in the money supply? e. Intuitively (ie no calculation needed) what must happen to bank reserves? f. Suppose instead of buying tbills, the FED lowers the required reserve ratio to 0. What is the new money supply? g. Suppose that due to the advent of ATMs and debit cards, consumers decide to hold less currency relative to deposits so that the currency to deposit ratio is now 1/4. Calculate the money supply and money multiplier (use the original monetary base, $600, and required reserve ratio, 1/4).
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