Suppose that currency in circulation is $800 billion, the amount of checkable deposits is 1500 billion with the required reserve ratio on checkable deposits is 12% and banks hold an excess reserves of $50 billion.
a) Calculate the money supply, the currency deposit ratio, the excess reserve ratio, the money multiplier.
b) Suppose the economy is in severe recession and the central bank plans to conduct open market operations with large purchases of bonds held by banks of $1,800 billion. Assuming the ratios you have calculated above remains the same, what do you predict will be the effect on the money supply. (Hint: calculate the monetary base first, and then use the money multiplier you calculate above to calculate the money supply M = m*MB)
c) Now suppose after the open market purchases by the central bank, banks choose to hold all of those proceedings as excess reserves rather than loan them out due to fear of financial crisis. Assuming that currency and deposits remain the same, what happens to the amount of money supply, excess reserves, the excess reserve ratio and the money multiplier