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3) Suppose that currency in circulation is $400 billion, the amount of chequable deposits is $800 billion, the desired reserve ratio is 10%, and excess
3) Suppose that currency in circulation is $400 billion, the amount of chequable deposits is $800 billion, the desired reserve ratio is 10%, and excess reserves are $15 billion.
- Calculate the money supply M, the currency deposit ratio c, the excess reserve ratio e, and the money multiplier m. Show your calculation steps for full mark.
- Suppose the central bank conducts an unusually large open market purchase of bonds held by banks of $1500 billion to relieve the liquidity crisis caused by COVID -19 outbreak. Assuming the ratios you calculated in part (a) remain the same, what will happen to the money supply? Show your calculation steps for full mark.
- Suppose the central bank conducts the same open market purchase as in part (b) except that banks choose to hold all these proceeds as excess reserves rather than loan them out due to fear of a financial crisis. Assuming that currency and deposits remain the same, what happens to the amount of excess reserves ER, the excess reserve ratio e, the money supply M, and the money multiplier m? Show your calculation steps for full mark.
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