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1. Assume that the banking system has total reserves of $200billion. Assume also that the reserve ratio is 40 percent and thatthere is no currency in this economy.
a. What is the money multiplier? What is the money supply?

b. Suppose the Fed then raises legal reserve requirements andcauses the reserve ratio to increase to 50 percent of deposits.What is the new value of the money multiplier? What is the changein the money supply?

2. Suppose that nominal GDP is $8,000 billion, the GDP deflator hasa value of 2, and velocity is 4. Also assume that velocity does notchange over time.
a. What is the value of real GDP? How big is the nominal moneysupply?

b. If the Federal Reserve wants to keep the annual inflation rateconstant at 1 percent, and the average growth rate of real GDP overtime is 3 percent per year, how fast should the money supply growon average over time to achieve the target inflation rate?

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Joshua Stredder
Joshua StredderLv10
28 Sep 2019

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Related questions

Suppose that this year’s money supply is $500 billion, nominal GDP is $10 trillion, and real GDP is $5 trillion.

a. What is the price level? What is the velocity of money?

b. Suppose that velocity is constant and the economy’s output of goods and services rises by 5 percent each year. What will happen to nominal GDP and the price level next year if the Fed keeps the money supply constant?

c. What money supply should the Fed set next year if it wants to keep the price level stable?

d. What money supply should the Fed set next year if it wants inflation of 10 percent?

Consider the following demand equation for money.

(M/P)d = kY

a) In words, explain what the velocity of money is.

b) Let the supply of (real) money be given by M/P. Using the money demand equation, solve for the velocity of money.

c) Suppose that real GDP is expected to grow 3% over the next year and k is constant. What is the expected rate of inflation if the Fed holds the money supply constant?

d) Suppose that the Fed (Federal Reserve) targets inflation to be 2% over the coming year. What should be the targeted growth rate of the money supply?

e) Suppose that growth in real GDP ends up being 1%. Assuming the Fed carries out its open market operations, expecting a growth rate of 3%, what will happen to the rate of inflation?

f) Is there reason to think that demand for money should be a function of the nominal interest rate? Why?

g) Modify the money demand equation that is given to include the nominal interest rate.

Assume that the banking system has total reserves of $100 million. Assume also that the reserve requirement for checking deposits is 10 percent and that banks do not hold any excess reserves. There is also no currency held by households.

a) What is the money multiplier? What is the money supply?

b) If the FED raises required reserves to 20 percent of deposits, what are the change in reserves and the change in money supply?

c) Now suppose the FED lowers the requirement from 10 percent to 5 percent, but banks choose to hold another 5 percent of deposits as excess reserves. Why might banks do so? What is the overall change in the money multiplier and the money supply as a result of these actions?

d) If the FED sells $1 million of government bonds, what is the effect on the economy's reserves and money supply? Use 10 percent required reserve ratio.

e) If the FED buys $5 million of government bonds, what is the effect on the economy's reserves and money supply? Use 10 percent required reserve ratio.

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