Chapter 1. Chapter 4 – Problem 5

Step 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 economy of Robberia, the monetary base is $2,000. People hold half of their money in the form of currency (and thus half as bank deposits). Banks hold a quarter of their deposits in reserve.

What are the reserve–deposit ratio, the currency–deposit ratio, the money multiplier, and the money supply?

Reserve-deposit Ratio = Krc9lGqKlGMakegq

Currency-deposit Ratio = 0VV1JcqyBrI=

Money Multiplier = sajgj4NQF4R0G3rY

Money Supply = $Yh0rECejwMhzJ6umwzW5XQ==

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

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Step 2

Question

In the economy of Robberia, the monetary base is $2,000. People hold half of their money in the form of currency (and thus half as bank deposits). Banks hold a quarter of their deposits in reserve.

One day, a rash of street robberies strikes fear in the population, and people now want to hold only a fifth of their money in the form of currency. If the central bank does nothing, what is the new money supply?

Money Supply = $lVB8SM18pr0vkihEZEIMqg==

Review text pages 93-96 for a discussion of the money multiplier model and the determinants of the money supply.

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Step 3

Question

In the economy of Robberia, the monetary base is $2,000. People hold half of their money in the form of currency (and thus half as bank deposits). Banks hold a quarter of their deposits in reserve.

If, in the face of this panic, 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, in dollars, how much central bank needs to transact.

The central bank sells $KHsVzro4jkU= worth 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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