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During the Great Depression, depositors became concerned about the safety of their bank deposits and they...

During the Great Depression, depositors became concerned about the safety of their bank deposits and they started to withdraw cash. This question is about the appropriate monetary policy response. Assume initially reserve ratio rr = 0.1, c = 0.2, e = 0, and MB = 100.

a. Compute the initial money supply M1, currency C, deposits D, and reserves R.

b. Suppose the currency-deposit ratio rises to c=0.4. Determine the levels of M1, C, D, and R if the Fed does not respond. What open market operation would be needed to prevent a change in M1? Be specific about direction and amount of the open market operation.

c. Suppose banks, being concerned about further currency withdrawals, start holding excess reserves. Specifically, suppose e=0.2 and c=0.4. Determine the levels of M1, C, D, and R if the Fed does not respond. What open market operation would be needed to prevent a change in M1? Be specific about direction and amount of the open market operation.

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