Chapter 1. Chapter 4 – Problem 4

Question 1

Work It Out

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You must read each slide, and complete any questions on the slide, in sequence.

Question

In the nation of Orcam, people hold $2,000 of currency and $10,000 of demand deposits in the only bank, Orcbank. The reserve–deposit ratio is 0.2.

a. What are the money supply, the monetary base, and the money multiplier?

Money Supply = p21IXWjZbyahVMNeCuJjLqU4x+KdkhvkYhEEAq4O0Ko=

Money Multiplier = qLQeKHHdHd3e2CwkniCItrB9SWE=

Monetary Base = G9ucp3P6CqI6wqb4QGGwXHuvGJs1O91egq6nFjS9w2s=

Review text pages 93-94 for a discussion of the money multiplier model and the determinants of the money supply.

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Question 2

Question

In the nation of Orcam, people hold $2,000 of currency and $10,000 of demand deposits in the only bank, Orcbank. The reserve–deposit ratio is 0.2.

b. Assume that Orcbank is a simple bank: it takes in deposits, makes loans, and has no capital. Show Orbank’s balance sheet. What value of loans does the bank have outstanding?

Orcbank
Assets		Liabilities
Reserves	$2,000	Deposits	$10,000
Loans	?
Total	$10,000	Total	$10,000

Loans = $PHbnbUCCgLO4sk2ZTf41+w==

Review text Section 4-2 for discussion of bank balance sheets.

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Question 3

Question

In the nation of Orcam, people hold $2,000 of currency and $10,000 of demand deposits in the only bank, Orcbank. The reserve–deposit ratio is 0.2.

c. Orcam’s central bank wants to reduce 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 transact.

Orcam’s Central Bank should buy $ogGXSFbg9qI= of bonds.

Review text pages 93-96 for a discussion of how a central bank affects the money supply through changes in the monetary base.

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