08 Jun Question 1) In the nation of Wiknam, peop
Question
1) In the nation of Wiknam, people hold $1,000 of currency and $4,000 of demand deposits in the only bank, Wikbank. The reserve–deposit ratio is 0.25.
a. What are the money supply, the monetary base, and the money multiplier?
b. Assume that Wikbank is a simple bank: it takes in deposits, makes loans, and has no capital. Show Wikbank’s balance sheet. What value of loans does the bank have outstanding?
c. Wiknam’s central bank wants to increase the money supply by 10 percent. Should it buy or sell government bonds in open-market operations? Assuming no change in the money multiplier, calculate, in dollars, how much central bank needs to transact.
2) In the economy of Panicia, the monetary base is $1,000. People hold a third of their money in form of currency (and thus two-thirds as bank deposits). Banks hold a third of their deposits in reserve.
a) What are the reserve-deposit ratio, the currency-deposit ratio, the money multiplier, and the money supply?
b) One day, fear about the banking system strikes the population, and people now want to hold half their money in the form of currency. If the central bank does nothing, what is the new money supply?
c) If, in the face of this panic, the central bank wants to conduct an open-market operation to keep the money supply at its original level, does it buy or sell government bonds? Calculate, in dollars, how much the central bank needs to transact.
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