Consider the following data (all values are in billions of dollars). Calculate the values for each period for the currency ratio, the ratio of total reserves to deposits, the monetary base, the money multiplier, and the money supply. Can you explain why the currency ratio and the ratio of total reserves to deposits moved as they did between 1930 and 1932?

June 1930 June 1931 June 1932

Currency $3.681 $3.995 $4.959

Checkable deposits 21.612 19.888 15.490

Bank reserves 3.227 3.307 2.829

Allan Meltzer of Carnegie Mellon University wrote the following about how the Federal Reserve Boards staff analyzed the likely effects of the large excess reserves banks were holding in the mid-1930s: [The] Boards staff [assumed] that none of the excess reserves were held for reasons of safety based on experience. The result was a large overestimate of potential monetary and credit expansion and prospective inflation and an underestimate of the effect of higher reserve requirement ratios.

a. Calculate the values for each period for the currency ratio, the ratio of total reserves to deposits, the monetary base, the money multiplier, and the money supply.

b. What happened to the currency ratio and the ratio of total reserves to deposits between 1930 and 1932?

c. Why might banks in the mid-1930s have been holding reserves for reasons of safety?

d. What does Meltzer mean by potential monetary and credit expansion?

e. If banks were holding excess reserves for reasons of safety, why might the Feds staff have been overestimating potential monetary and credit expansion?

f. What was the effect on banks of the Feds decision to increase the required reserve ratio? What insight does Meltzer give into why the Feds staff underestimated the effect of the increase?