Question Four

Suppose the banks in an economy have a reserve-deposit ratio of 10 percent and the currency deposit ratio is 20 percent.

a. If the Central Bank increases the monetary base by $400 through open market operations,

what will be the increase in the money supply?

b. If the Central Bank increases the discount rate and firms react by increasing the reserve deposit ratio to 15 percent, what is the change in the multiplier? Will this change increase or decrease the money supply?

c. Critically discuss three financial innovations and their impact on money supply and

money demand?

d. What are your views on the impact financial innovations have had on money supply and

money demand?