Economics 202 Principles of Macroeconomics Homework Chapter 8 Suppose a bank's desired reserves are 20%, and customers deposit 5,000 in their checking accounts at a bank a. How much do the bank's reserves change? 5000 ( Has not mande loans yet ) b. At this point, by how much has the money supply changed as a re- sult of this deposit? MI = C +R SOOD changed from criculation to Deposits C. Now suppose the bank makes new loans of the amount of its un-, planned reserves. By how much has the money supply changed as a result of these new loans by this one bank? increase by 4 4, 020 1,00 0 R 4005 80% unplanned reserves loand which -increases checkable deposits Suppose the Fed buys $5 billion of securities from commercial banks The desired reserve ratio is .085, and the currency drain ratio is . 06. See By how much have the banks )reserves changed? Grom Com Bank + 5 billion just bank + Ros 8+ ROS What is the money multiplier? mm = Itc It .06 7.31 C+r . 06+.085 -7.3103 What is the change in the money supply which results from this open market purchase by the Fed? 5, 30 0 00 0 090 mi = mm . MB = 7. 31. 725, 009, 090. ooo oooloos silw vi sbuoys MB = C + R = (c+r) D (.06+. 085 ) 5bil . 185. ' 5 bil =Suppose the Fed sells $10 billion of securities to the public and the pub lic pays the Fed from their checking accounts at their commercial banks. The the desired reserve ratio is .085, and the currency drain ratio is .06. By how much have reserves in the banking system changed? Fed Bank Public -20b - 10Rest -10 Res / - Jepost + 10 sec - 6 see What is the change in the money supply which results from this open market sale by the Fed? mi = mm meer . 731 . ( - 20bil + 10bil ) - 7 310300600 = =- lobil + Suppose the Fed decreases the discount rate so that banks borrow $80 billion more in discount loans from the Fed. The desired reserve ratio is . 1 and the cur- rency drain ratio is . 05. Bank + Red By how much have reserves in the banking system changed? + 160 bi + 8obi! in bank; + ed in Fed What is the money multiplier? : = 17. 05 27 . 25 + . 1 What is the change in the money supply which results from this de- crease in the discount rate? mis mm. mc 4.8 Ell = 480100,DOODoo Cocoo'doo 3 9 9's = 1/29's = Now suppose, as in question 2, that the Fed buys $5 billion of securities from - 30 Buying commercial banks, but the desired reserve ratio increases to 20% while the cur- rency drain ratio remains .06 Securities = effect on What is the effect of this increase in the desired reserve ratio on the in- crease in the money supply? mm as Increase in reserve ratio will decrease the money supply making loung Now suppose in question 2, the desired reserve ratio is again .085, but the cur- rency drain ratio increases to . 15 What is the effect of this increase in the currency drain ratio on the in- crease in the money supply? Increase in "a" will result in increase of mm