1. Please define each of the following terms:
a. Vault cash
b. Reserve ratio
c. Reserve requirement (required reserve ratio)
d. Required reserves
e. Excess reserves
Due Wed. 2/24
1. How is the money multiplier calculated?
2. What is the relationship between the reserve requirement and the money multiplier?
3. Why is the amount of money created through the money multiplier process usually a high estimate/overstatement of how much money is actually created by the banking system?
Due Thurs. 2/25
1)Tina deposits $500 that was in her sock drawer into a
checking account at the local bank.
a. By how much can this bank increase the money supply?
b. By how much can the banking system increase the money supply?
2) The central bank of Economania has $100 million in checkable deposits; the initial required reserve
ratio is 10%. The commercial banks follow a policy of holding no excess
reserves. The public holds no currency,
only checkable deposits in the banking system.
a. By how will the money supply change
if the required reserve ratio falls to 5%?
b. Assume that it is the Federal Reserve (central bank) that made the decision to decrease the required reserve ratio. On a properly labeled graph of the money market, show the results of this policy change on nominal ir and Q of money.
c. Considering the change to nominal ir you determine in b, illustrate on an AS/AD diagram the impacts of this change on output, PL, and UR.
