economics

The money multiplier.  Suppose that the currency-deposit ratio (c) is 50%, the required reserve ratio (rrD) is 10%, and the excess reserve ratio (e) is 105%.  The monetary base is by $4.4 t.  Round your answers to two decimal places. (4 points per blank.)

 

 

 

  1. The volume of M1 is $__________t.

     

    Hint: use the money multiplier formula (final version).

     

  2. The volume of deposits D is $ ________ t.

     

  3. The volume of currency held by the public c is $________ t.

     

  4. The volume of bank reserves R is $ _________ t.

     

    Hint: Use the identities M1 = C + D and C = cD to solve for D and then for C, then use the C you found with the identity B = C + R to solve for R.

     

    Suppose now that the excess reserve ratio falls to 60%, other ratios and the monetary base remain the same, and the money-supply process runs its course.

     

  5. The volume of M1 becomes $___________ t.

     

  6. The volume of bank reserves becomes $___________ t.

 

 

2. Current data. Consider the following data for 31 March 2017. (5 points per blank)

 

 

 

B        $3746 b

 

M1      $3445 b

 

Y       $18,869 b

 

 

 

  1. The M1 money multiplier is _______

     

  2. The velocity of M1 is ________

     

    3. The equation of exchange and inflation; see lecture notes to Unit 14.

    Fill in the blanks using the equation of exchange MV = Py  and the definition Py = Y. Round answers to two decimal places.  (4 points per blank)

     

    case             M                  V                  P                  y                   Y

     

    1                   ___               5                   ___               400               640

     

    2                   144               5                   ___               400               ___

     

     

2. The equation of exchange and inflation; see lecture notes to Unit 14.

 

a. Fill in the blanks (3.5 points each). Use the equation of exchange MV = Py  and the definition Py = Y. Round answers to two decimal places. 

 

 

 

case             M                  V                  P                  y                   Y

 

 

 

1                   ___               5                   ___               400               640

 

 

 

2                   144               5                   ___              400               ___

 

 

 

b. If “case 1” is the US in 2014, and “case 2” is the US one year later, what is the inflation rate over that year? Measure it as the change in P divided by the original P.

 

                                                                                                            ΔP/P = ____%

 

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