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Macroeconomics Mankiw - 9th edition
Chapter 3, question 4

âIn the nation of Wiknam, people hold $1,000 of currency and $4,000 of demand
deposits in the only bank, Wikbank. The reserve-deposit ratio is 0.25.

a. What are the money supply, the monetary base, and the money multiplier?
b. Assume that Wikbank is a simple bank: it takes in deposits, makes loans, and has no capital. Show Wikbank's balance sheet. What value of loans does the bank have outstanding?
c. Wiknam's central bank wants to increase the money supply by 10 percent. Should it buy or sell government bonds in open-market operations? Assuming no change in the money multiplier, calculate, in dollars, how much central bank needs to trans

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Darryn D'Souza
Darryn D'SouzaLv10
28 Sep 2019

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Related questions

In a country the monetary base is 1000. People hold one-fourth of their money in the form of currency (and thus three-fourths as bank deposits). Banks hold a third of their deposits in reserve.

a) What is reserve-deposit ratio, currency-deposit ratio, the money multiplier, and the money supply?

b) One day, Government passed a new rule that people needs to pay tax on their currency holdings, and people now want to hold one-fifth their money in the form of currency (and thus four-fifths as bank deposits). If the central bank does nothing, what is the money supply?

c) The central bank wants to conduct an open market operation to keep the money supply at its original level, does it buy or sell government bonds? Calculate how much the central bank needs to transact.

1. In a system of fractional-reserve banking, even without any action by the central bank, the money supply declines if households choose to hold (less, more) currency or if banks choose to hold (less, more) excess reserves.

2. If the Fed makes an open-market purchase of government bonds, it will (decrease, increase) the money supply. Whereas if there is an increase in the discount rate on Fed lending, it will (decrease, increase) the money supply.

3. Chloe takes $100 of currency from her wallet and deposits it into her checking account. If the bank adds the entire $100 to reserves, the money supply(decreases, doesn't change, increases), but if the bank lends out some of the $100, the money supply (decreases, doesn't change, increases).

4. If the reserve ratio is 0.25 and the central bank increases the quantity of reserves in the banking system by $120, the money supply increases by how much?

 

1. (0.2 pt) In a system of fractional-reserve banking, even without any action by the central bank, the money supply declines if households choose to hold (less, more) currency or if banks choose to hold (less, more) excess reserves. 

2. (0.2 pt) If the Fed makes an open-market purchase of government bonds, it will (decrease, increase) the money supply. Whereas if there is an increase in the discount rate on Fed lending, it will (decrease, increase) the money supply. 

3. (0.2 pt) Chloe takes $100 of currency from her wallet and deposits it into her checking account. If the bank adds the entire $100 to reserves, the money supply (decreases, doesn't change, increases), but if the bank lends out some of the $100, the money supply (decreases, doesn't change, increases). 

4.(0.2 pt) If the reserve ratio is 0.25 and the central bank increases the quantity of reserves in the banking system by $120, the money supply increases by how much? (Make sure to show all your work.)

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