assignment 8

# Assume a simple money creation model with no cash

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Assume a simple money creation model, with no cash drain, no time deposits, and banks desire to hold no excess reserves. How does the open market purchase affect the T-accounts for FirstBank, SecondBank and ThirdBank? What is the total increase in deposits that results from the initial change in reserves? Assets Securities -\$10000 Reserve +\$10000 Loans +\$10000 Assets Reserve +\$2000 Loans +\$8000 Assets Reserve +\$1600 Loans +\$6400 Liability Liability Liability First Bank Second Bank Third Bank Checkable deposit +\$10000 Checkable deposit +\$8000

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Econ 350 Winter 2012 Assignment 8 2 And total \$2000+\$1600=\$3600 in reserves, So D= 1/0.2 *\$3600=\$18000 3. Assume a model where the currency ratio is 0.2 (c = 0.2), the excess reserve ratio is 0.2 (e = 0.2), and the required reserve ratio is 0.2 (r = 0.2). What is the money multiplier? What change in the money supply results from an open market sale of \$2,000? money multiplier m=(1+c)/(r+e+c) = (1+0.2)/(0.2+0.2+0.2)= 2 M=m*MB= -\$2000*2=-\$4000 The money supply will decline by \$4000 4. To prepare for the last group projects on Thursday, watch the following episode of the news show “Bill Moyers Journal”:
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