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Part 1: Multiple choice questions:Questions 1-10 are worth 3 points each. Questions 11-12 are worth 4 points each.Question 13 / 3 ptsMoney Supply ProblemYou are hired by the Chair of the Federal Reserve to manage the trading deskat the New York Fed and the Chair tells you that he wants you to increase themoney supply (M1) by 33.33 percent. They warn you to be careful because inthese uncertain times, the money multiplier tends to become very unstable. They suggest that you stay ‘closely connected’ with the banking sector and then gives you a list of phone numbers to do so. Note that in this problem weare targeting the growth rate of M1.Reserve Market Initial Conditions (Scenario A)rr/D= .10C = 500 billionD = 2000 billionER = 0 (not a typo)M = C + DUse the initial conditions IN SCENARIO A above to answer #1-3.What is the MB?Question 23 / 3 ptsWhat is the money multiplier? Round to 4 decimal places.Question 33 / 3 ptsWhat is the money supply? Use mm x MB to calculate this. Round to the nearest whole number.
M = 3.5714 x 700 = 2499.98 = M = C + DQuestion 43 / 3 ptsScenario B:So you decide to inject $100 billion in reserves via open market purchases with phone in hand. Recall, the Chair said to watch that multiplier and so you start making some calls. Just as you suspected, the banks aren’t making any loans, that is, they are sitting on all $100 billion in excess reserves.Given these new conditions from SCENARIO B, answer #4-6.What is the MB?Question 53 / 3 ptsWhat is the money multiplier? Round to 3 decimal places.Question 63 / 3 ptsWhat is the money supply? Use mm x MB to calculate this.Question 73 / 3 ptsNow the Chair calls and asks you how things are going and you tell him/her that you injected $100 billion in the system but it didn’t work because banks are holding on to the ER (the banks never loaned them out, they hoarded them instead).,
C = 900 bD = 1600 bER =100 bUse the new conditions from SCENARIO C to answer #7-9. What is the MB?