Question

Suppose r =.12, C = 900 billion, D = 1500 billion, ER= 120 billion, DL=10 billion.

a. What is the money multiplier (for M1)

b. What is the monetary base? What is the money supply (M1)?

c. If the Fed changes the non-borrowed monetary base by selling $6 billion of bonds, what is the change in money supply? Is the change positive or negative?

Answer 1

Suppose r =.12, C = 900 billion, D = 1500 billion, ER= 120 billion, DL=10 billion.

a. What is the money multiplier (for M1)

C-D ratio = 900/1500 = 60%, ER-D ratio = 120/1500 = 8% and RR-D ratio = 12%. Multiplier = (1 + 60%)/(8% + 12% + 60%) = 2

b. What is the monetary base? What is the money supply (M1)?

Required reserves = 12% of D = 12% * 1500 = 180 billion. Monetary base = C + Reserves = 900 + 180 + 120 = 1200 billion. M1 = C + D = 900 + 1500 = 2400 billion

c. If the Fed changes the non-borrowed monetary base by selling $6 billion of bonds, money supply is reduced by 6*2 = $12 billion. This change is negative as selling of bonds will reduce money supply