25 Jul DOES THE MONEY SUPPLY INCREASE OR DECREASE WITH FIXED RESERVES AS BANK DO NOT HOLD EXCESS RESERVES ANYMORE?
Consid Show more Hi we use Macroeconomics N. Gregory Mankiw Macmillan International Edition (2012) 8th Ed. Consider an economy in which (1) people and firms hold 1.12 TL of currency for every 4 TL they hold in deposits (2) the required reserve ratio is 9% but (3) banks find it safer (and prefer) to hold 3% of deposits as excess reserves. Suppose that the Central Bank keeps total reserves constant at 300 TL (by conducting day-to-day open market operations). Answer the following questions: (a) Calculate the total amount of money held in deposits. (b) Calculate the total amount of currency held by non-bank public. (c) Calculate the money supply. (d) Calculate the monetary base. (e) Calculate the money multiplier in two different ways (you can calculate the multiplier either by using the figure found for the monetary base or without using the monetary base). (f) Suppose banks change the way they operate and do not hold excess reserves anymore but the Central Bank still keeps total reserves at 300 TL (Remember: As banks get rid of excess reserves they loan them out and each bank may hold less reserves at that time but as loans taken out by new bank customers are re-deposited in banks deposits and therefore reserves (this time only required reserves) will increase and the Central Bank can still keep reserves as high as it wants). Recalculate all your answers in parts (a) (e). (g) (bonus) Does the money supply increase or decrease with fixed reserves as bank do not hold excess reserves anymore? Why? Show less
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