Question

Consider an economy where banks keep 25% of deposits as reserves. Currency is 50 billion pesos,...

Consider an economy where banks keep 25% of deposits as reserves. Currency is 50 billion pesos, which constitutes 10% of the monetary base. If the central bank buys 10 billion pesos worth of securities, calculate the percentage change in the monetary base and the percentage change in the money supply assuming that the currency-deposit ratio and the reserve-deposit ratio stay unchanged.

Homework Answers

Answer #1

Answer:

Given,

Currency = 50 billon (i.e., 10% of monetary base)

Therefore,

Monetary base(in billions)

= (100/10) x 50

= 500 billions

Now, central bank buys 10 billion

That remains with 500 - 10 = 490 billions of monetary base.

% Change in monetary base

= ( Change in base / Old base ) x 100

= [ (500 - 490) / 500 ] x 100

= 2%

[ Note :  There is no % change in money supply, as reserve ratio is given constant.

Money supply increases, when reserve ratio decreases, and vice versa ]

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
An economy requires banks to keep 10% of deposits as reserves. Currency is 50 billion dollars...
An economy requires banks to keep 10% of deposits as reserves. Currency is 50 billion dollars and deposits are 2000 billion dollars. A) calculate the money supply B) calculate the monetary base C) If the central bank sells 20 billion in dollars worth of securities calculate the resulting money supply assuming the currency deposit ratio and the reserve deposit ratio stay the same
Suppose that currency in circulation is $800 billion, the amount of checkable deposits is $1200 billion,...
Suppose that currency in circulation is $800 billion, the amount of checkable deposits is $1200 billion, the required reserve ratio is 10% and excess reserves are $12 billion. a. Calculate the money supply, the currency-to-deposit ratio, the excess reserve ratio, and the money multiplier. b. Suppose the central bank conducts an unusually large open market purchase of bonds held by banks of $2000 billion due to a sharp contraction in the economy. Assuming the ratios you calculated in part (a)...
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 the reserve requirement os 5 percent, banks keep no excess reserves and the currency in...
suppose the reserve requirement os 5 percent, banks keep no excess reserves and the currency in the hands of the non-bank public does not change. a Suppose the central bank sells government securities to a commercial bank. will the money supply increase or decrease? why? b.Calculate the change in the money supply if the central sells $1000 worth of government securities to a commercial bank.
Suppose that currency in circulation is $800 billion, the amount of checkable deposits is $1200 billion,...
Suppose that currency in circulation is $800 billion, the amount of checkable deposits is $1200 billion, the required reserve ratio is 10% and excess reserves are $12 billion. a. Calculate the money supply, the currency-to-deposit ratio, the excess reserve ratio, and the money multiplier. b. Suppose the central bank conducts an unusually large open market purchase of bonds held by banks of $2000 billion due to a sharp contraction in the economy. Assuming the ratios you calculated in part (a)...
Suppose that currency in circulation (C) is $50 billion, the amount of checkable deposits (D) is...
Suppose that currency in circulation (C) is $50 billion, the amount of checkable deposits (D) is $500 billion, and excess reserves (ER) are $20 billion. Also, the required reserve ratio (rD) on checkable deposits is 5%. Calculate the money supply (M), the required reserves (RR), the total reserves (R), the monetary base (MB), the currency-to-deposit ratio (c), the excess reserve-todeposit ratio (e), and the money multiplier (m)
You are given the following information about the economy of​ Nocoin The banks have deposits of​...
You are given the following information about the economy of​ Nocoin The banks have deposits of​ $300 billion. Their reserves are​ $15 billion, two thirds of which is in deposits with the central bank. Households and firms hold​ $30 billion in bank notes. There are no​ coins!   The banks have no excess reserves. Suppose that the central bank in Nocoin increases bank reserves by​ $0.5 billion. Explain why the change in the quantity of money is not equal to the...
Category Value Total Reserves (private banks) $100 Billion Currency (firms, households) $50 Billion Value of Euros...
Category Value Total Reserves (private banks) $100 Billion Currency (firms, households) $50 Billion Value of Euros in the U.S. (private banks, firms, households) $1 Billion Gov’t bonds (private banks, firms, households) $30 Billion Demand deposits (private banks) $1 Trillion Certificates of Deposit, CDs (private banks) $10 Billion Reserve requirement on demand deposits .10 Suppose the Fed buys $40 billion bonds from private banks. What is the total amount of reserves banks can lend and how much additional money is created...
supposethatcurrencyincirculationis$600billion,theamountof chequable deposits is $900 billion, and excess reserves are $15 billion and the desired reserve...
supposethatcurrencyincirculationis$600billion,theamountof chequable deposits is $900 billion, and excess reserves are $15 billion and the desired reserve ratio is 10%. a. Calculate the money supply, the currency deposit ratio, the excess reserve ratio, and the money multiplier. b. Suppose the central bank conducts an unusually large open market purchase of bonds held by banks of $1400 billion due to a sharp contraction in the economy. Assuming the ratios you calculated in part (a) remain the same, predict the effect on the...
Suppose the required reserve ratio is 10%, excess reserves holdings are 65% of deposits, and currency...
Suppose the required reserve ratio is 10%, excess reserves holdings are 65% of deposits, and currency holdings are 45% of deposits. If the Fed buys $500 million worth of securities, what will be the change in the money supply (measured in dollars)?