You are hired by the Chair of the Federal Reserve to manage the trading desk at the New York Fed and the Chair tells you that he wants you to increase the money supply (M1) by 33.33 percent. They warn you to be careful because in these uncertain times, the money multiplier tends to become very unstable. They suggest that you stay 'closely connected' with the banking sector and then gives you a list of phone numbers to do so. Note that in this problem we are targeting the growth rate of M1.

Reserve Market Initial Conditions (Scenario A)

rr/D= .10

C = 500 billion

D = 2000 billion

ER = 0 (not a typo)

M = C + D

Scenario B:So you decide to inject $100 billion in reserves via open market purchases with phone in hand. Recall, the Chair said to watch that multiplier and so you start making some calls. Just as you suspected, the banks aren't making any loans, that is, they are sitting on all $100 billion in excess reserves.

Given these new conditions from SCENARIO B, answer #4-6.

#4 What is the MB?

#5 What is the money multiplier?Round to 3 decimal places.

#6 What is the money supply? Use mm x MB to calculate this.

Now the Chair calls and asks you how things are going and you tell him/her that you injected $100 billion in the systembut it didn't work because banks are holding on to the ER (the banks never loaned them out, they hoarded them instead).

Scenario C:Now you get some calls from bankers and you learn that there has been some 'internal substitution' within the M1 money supply. In particular, households prefer tohold more currency relative to deposits, i.e., the currency to deposit ratio rises. The new numbers are as follows:

rr/D= .10

C = 900 b

D = 1600 b

ER =100 b

Use the new conditions from SCENARIO C to answer #7-9.

#7 What is the MB?

#8 What is the money multiplier?Round to 4 decimal places.

#9 What is the money supply? Use mm x MB to calculate this andRound to the nearest whole number.

Scenario D:Now the Chair is not pleased with your work, and calls again. Assuming that the money multiplier is now stable (i.e., the value you found in #8), you need to figure out what to do, in terms of open market operations, to hit the 33.33 percent money growth rate desired by the chair and the FOMC. you must first identify the target money supply. Then you will be able to calculate the needed monetary base and finally you will be able to calculate the amount of open market purchases/sales.

# 10 Your goal is to increase the money supply by 33.33%. Use the Money supply you found in #9 and increase it by 33.33%. The target money supply is_________:Round to the nearest whole number

#11 The money multiplier is stable at the value you found in #8. Use it and your answer from #10 to calculate the appropriate monetary base.Round to the nearest whole number.

#12 An open market _______of ______ must occur to reach the monetary base found in #11 above(hint: take your answer from #11 and subtract your answer from #7).