Chapter 17 Practice Problems
2. Compute the impact on the money multiplier of an increase in desired currency holdings from 10 percent to 15 percent of deposits when the reserve requirement is 10 percent of deposits, and banks’ desired excess reserves are 3 percent of deposits.
++3. Consider an open market purchase by the Fed of $3 billion of Treasury bonds. Show the impact of the purchase on the bank from which the Fed bought the securities. Then, using the assumptions in problem 2, compute the impact on M1.
4. Why is currency circulating in the hands of the nonbank public considered a liability of the central bank?