Question

Suppose the reserve requirement is 0.20 and the marginal propensity to consume is 0.92. a.       ...

Suppose the reserve requirement is 0.20 and the marginal propensity to consume is 0.92.

a.        Calculate the money multiplier.

b.        Calculate the Keynesian income multiplier.

c.        Suppose the coronavirus pandemic has caused a crash in stock prices and has also negatively affected business confidence.

(1)        What components of expenditures are affected by the change in confidence, and in what direction?

(2)      Suppose the expenditures in (1) are affected by $200 billion. Using the Keynesian income multiplier calculated in (b), what is the expected ultimate impact on the national income?

d.        What would the Fed do with the discount rate and with the reserve requirement if it wanted to use monetary policy to deal with the problem in (c)? Explain how the money supply is affected by these actions.

e.         Suppose the Fed engaged in $16 billion in open market operations to deal with the problem in (c). What would it do? Using the money multiplier calculated in (a), how would the money supply ultimately be affected by this action?

f.         What impact would the action in (e) have on interest rates and how would that help in this situation?

g.        What problems might prevent this action by the Fed from being effective?

h.        Suppose the federal government decides to use fiscal policy to deal with the problem in (c ).

(1)        What would it do?

(2)      How would rational expectations and crowding out limit the effectiveness of this action?

Homework Answers

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Suppose the reserve requirement is 0.20 and the marginal propensity to consume is 0.92. a.       ...
Suppose the reserve requirement is 0.20 and the marginal propensity to consume is 0.92. a.        Calculate the money multiplier. b.        Calculate the Keynesian income multiplier. c.        Suppose the coronavirus pandemic has caused a crash in stock prices and has also negatively affected business confidence. (1)        What components of expenditures are affected by the change in confidence, and in what direction? (2)      Suppose the expenditures in (1) are affected by $200 billion. Using the Keynesian income...
Suppose the reserve requirement is initially set at 10%. Instructions: In parts a, b, and d,...
Suppose the reserve requirement is initially set at 10%. Instructions: In parts a, b, and d, enter your answers as a whole number. In part c, round your answer to two decimal places. a. At a reserve requirement of 10%, what is the value of the money multiplier?         b. If the reserve requirement is 10% and the Fed increases reserves by $20 billion, what is the total increase in the money supply?      $   billion c. Suppose the Fed raises the...
Suppose the reserve requirement is initially set at 8%. Instructions: In parts a and c, round...
Suppose the reserve requirement is initially set at 8%. Instructions: In parts a and c, round your answers to two decimal places. In parts b and d, round your answers to one decimal place. a. At a reserve requirement of 8%, what is the value of the money multiplier? b. If the reserve requirement is 8% and the Fed increases reserves by $30 billion, what is the total increase in the money supply? $ billion c. Suppose the Fed raises...
Suppose the reserve requirement is initially set at 5%. Instructions: In parts a and c, round...
Suppose the reserve requirement is initially set at 5%. Instructions: In parts a and c, round your answers to two decimal places. In parts b and d, round your answers to one decimal place. a. At a reserve requirement of 5%, what is the value of the money multiplier?       20 20 Correct b. If the reserve requirement is 5% and the Fed increases reserves by $40 billion, what is the total increase in the money supply?      $ 800 800 Correct...
Suppose currency is $500 billion, deposits are $700 billion, the reserve requirement is 10%, and excess...
Suppose currency is $500 billion, deposits are $700 billion, the reserve requirement is 10%, and excess reserves are $10 billion. Calculate the money supply, currency deposit ratio, excess reserve ratio and the money multiplier. Suppose the central bank conducts an open market purchase of $500 billion. Assume the ratios you calculated stay the same, predict the effect on the money supply.
Suppose that the reserve requirement for checking deposits is 10 percent and that banks do not...
Suppose that the reserve requirement for checking deposits is 10 percent and that banks do not hold any excess reserves. If the Fed sells $4 million of government bonds, what is the effect on the economy’s reserves and money supply? Now suppose the Fed lowers the reserve requirement 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...
Suppose the reserve requirement for the United States is 15%. Instructions: Round your answers to the...
Suppose the reserve requirement for the United States is 15%. Instructions: Round your answers to the nearest whole number. a. Suppose the Federal Reserve wants to increase the money supply. What should it do to accomplish this goal?      The Fed could make an   (Click to select)   open market purchase   open market sale  of $30 billion, resulting in a total increase in the money supply of $ billion. b. Now suppose the Fed wants to decrease the money supply. What should it do to accomplish...
8. The reserve requirement, open market operations, and the money supply Assume that banks do not...
8. The reserve requirement, open market operations, and the money supply Assume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is demand deposits. To simplify the analysis, suppose the banking system has total reserves of $500. Determine the money multiplier and the money supply for each reserve requirement listed in the following table. Reserve Requirement Simple Money Multiplier Money Supply (Percent) (Dollars) 25 10 A lower reserve requirement...
8. The reserve requirement, open market operations, and the money supply Assume that banks do not...
8. The reserve requirement, open market operations, and the money supply Assume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is demand deposits. To simplify the analysis, suppose the banking system has total reserves of $300. Determine the money multiplier and the money supply for each reserve requirement listed in the following table. Reserve Requirement        Simple Money Multiplier                Money Supply ($$)       (Percent)           5   (0.5,...
1. Suppose that the reserve requirement is 10%. a) Using the formula, what money multiplier would...
1. Suppose that the reserve requirement is 10%. a) Using the formula, what money multiplier would this imply? b) Why might the actual money multiplier be smaller, particularly in a recession? 2. How does an expansion of the money supply affect interest rates? How does a contraction in the money supply affect interest rate? 3. The components of aggregate demand are C, I, G and X-M. a. How is consumption affected by an increase in interest rates? Why? b. How...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT