1. Suppose the monetary base is $8,000, the reserve requirement is .20, the currency-deposit ratio is .20, and excess reserves ratio is 0.10. In each case below, explain what would happen to: (i) the monetary base, (ii) the money multiplier, (iii) the money supply, (iv) bond prices, and (v) interest rates. Explain why each would or would not change (a few words will suffice). Give numerical answers where you have enough information. For each answer, compare the change to the initial conditions. (No graphs are required for parts 1A through 1E).

1A. Calculate the initial money multiplier and money supply:

Money Multiplier Money Supply .

1.B. The Fed buys $500 in securities in open market operations.

Monetary Base:

Money Multiplier:

Money Supply:

Bond Prices:

Interest Rates:

1.C. The Treasury sells $500 in bonds to finance a government stimulus package.

Monetary Base:

Money Multiplier:

Money Supply:

Bond Prices:

Interest Rates:

1.D. Banks become wary of making new loans and hold 0.20 of deposits as excess reserves (instead of 0.10).

Monetary Base:

Money Multiplier:

Money Supply:

Bond Prices:

Interest Rates:

1.E. The Fed intervenes in the foreign exchange market buying $100 dollars and selling euros.

Monetary Base:

Money Multiplier:

Money Supply:

Bond Prices:

Interest Rates

1.F. Suppose households, firms, and banks panic about the economy (very negative animal spirits) and try to hold onto cash rather than leaving it in banks or spending it. Explain what effect this would have on the money supply (discuss both the monetary base and the multiplier). Using both an IS-LM graph & an AD-SAS graph, explaining which curves shift and why. Explain what the effects would be on GDP, interest rates, and prices. Explain what the Fed might do to improve the economic situation. Illustrate this on both an IS-LM and AD-SAS graph by drawing new graphs that show the original effects of the panic and the effects of the Feds action.