Please Help Economics Hw?

Question

3. The required reserve ratio is 5 percent and the currency drain is 20 percent. If the Fed makes an open market purchase of $1 million of securities:

a. What is the change in the monetary base?

b. Which components of the monetary base change?

c. By how much does the quantity of money change?

d. How much of the new money is currency and how much is bank deposits?

Answer 1

3:

a) No change - just transformation of type.

b) One million goes M3→M1/M0

(M1/M0) - this type depends on your country standards. More here: http://en.wikipedia.org/wiki/Money_suppl...

Sometimes there is even M4 and gov securities included in M4.

c) Money multiplier=4.33

ΔMS= 4.33 - 1 = $+3.33

d) New money as currency (M1) = $ +1 million

Bank deposits = $3'333'333.33

Cash on hahd of the public = $833'333.33

Bank reserves: $166'666.67