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In this problem, we are going to find out the money multiplier one year prior to the Great Recession (12/2006) and compare it to the money multiplier five years hence (12/2011). The implication, as you may have guessed, is that since the Fed has been paying interest on excess reserves (10/2008), the excess reserve to deposit ratio has risen which implies a lower money multiplier.

Data you need for problem 1:

Monetary Base Dec 2006: 837.701 ; Dec 2011: 2603.487

Excess Reserves Dec 2006: 1.863 ; Dec 2011: 1502.206

Currency Dec 2006: 749.6 ; Dec 2011: 1001.5

Required Reserves Dec 2006: 41.419 ; Dec 2011: 96.510

Demand Deposits Dec 2006: 609.9 ; Dec 2011: 1154.6

a) find out the money multiplier for Dec 2006, one year prior to the Great Recession. Please show all work.

b) find out the money multiplier for Dec 2011, five years hence and a little more than three years after the Fed got the authority to pay interest on excess reserves. See the Federal Reserve's press release.

c) What is the percent change in the money multiplier in this five year period?

d) Now consider the change in the monetary base during this same five year period and compare it to the change in excess reserves. Is it a true statement to say most of the open market purchases that caused the monetary base to "blow up" ended up on bank's balance sheets as excess reserves. Be very specific with your answer using actual numbers. Which change is bigger and why?

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M946394

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