Assume an economy in which the reserve ratio is 15 percent, people hold 10 percent of their deposits in the form of cash, and there are no other leakages.
(a) Compute the value of the money multiplier.
(b) If the current level of high-powered money is $1,500 billion, what is the money supply in this economy?
(c) How much does the money supply change if the Fed buys $30 billion of U.S. government Treasury bills from a government bond dealer? How about if banks’ borrowings of reserves from the Fed decline by $6 billion?
(d) If the Fed set a target money supply of $6,424 billion, what would it have to do to achieve that target?