Week 11

1. Suppose that currency in circulation is equal to $300 billion, the required reserve ratio is 10%, checkable deposits are $600 billion, and excess reserves are $60 billion. Calculate the money multiplier.

2. Suppose that the required reserve ratio is 10%, total reserves are $20 billion, the ratio of excess reserves to checkable deposits is 0.10, and currency in circulation is $60 billion. Determine the level of checkable deposits outstanding. What is the quantity of money in circulation? What is the value of the money multiplier?

3. Assume the consumption function is given by

C = 600 + 0.90 (Y - T) - 0.2P

and that T = 100, where Y = aggregate income (GDP), T = taxes, and P = overall price level in the economy. The investment function is given by

I = 400 - 20i

and money demand is represented by

M^D = 200 - 10i.

Furthermore, assume that G = 100 (government spending), NX = 0 (net exports), and

Y^AS = P (i.e., the aggregate supply curve is an upward sloping 45 degree line in output -- price level).

a) Solve for the equilibrium values of the interest rate (i), aggregate income (Y), and the overall price level (P), assuming that the money supply is 100.

b) Suppose that net eports (NX) decline by 30. Compute the new equilibrium values of P and Y assuming that the Fed takes no action in response to this change.

c) Suppose the Fed wishes to restore the overall price level and aggregate output to the equilibrium values they took on before the change in net exports. Compute the level of money supply necessary to attain these values of P and Y. If the money multiplier is 10, how large an open market purchase or sale must the Fed conduct?