The Money Supply Process
1. Suppose that currency in circulation is $600 billion, the amount of checkable deposits is $900 billion, and excess reserves are $15 billion.
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 money supply.
c. Suppose the central bank conducts the same open market purchase as in part (b), except that banks choose to hold all of these proceeds as excess reserves rather than loan them out, due to fear of a financial crisis. Assuming that currency and deposits remain the same, what happens to the amount of excess reserves, the excess reserve ratio, the money supply, and the money multiplier?
d. During the financial crisis in 2008, the Federal Reserve began injecting the banking system with massive amounts of liquidity, and at the same time, very little lending occurred. As a result, the M1 money multiplier was below 1 for most of the time from October 2008 through 2011. How does this scenario relate to your answer to part (c)?
data analysis PROBLEMS
2. Go to the St. Louis Federal Reserve FRED database, and find the June 2013 data available on Currency (CURRNS), Total Checkable Deposits (TCDNS), Total Reserves (RESBALNS), and Required Reserves (RESBALREQ).
a. Calculate the value of the currency deposit ratio (c).
b. Use RESBALNS and RESBALREQ to calculate the amount of excess reserves, and then calculate the value of the excess reserve ratio (e). Be sure the units of total and required reserves are the same when you do the calculations.
c. Assuming a required reserve ratio (rr) of 11%, calculate the value of the money multiplier (m).
3. Go to the St. Louis Federal Reserve FRED database, and find data on the M1 Money Stock (M1SL) and the Monetary Base (AMBSL).
a. Calculate the value of the money multiplier June 2013 and June 2008.
b. Based on your answer to part (a), how much would a $100 million open market purchase of securities affect the M1 money supply today and five years ago?