04 Jun Question 1. Suppose that currency in circulation is
Question
1. Suppose that currency in circulation is $600 billion, the amount of checkable deposits is $900 billion, and excess reserves are $15 billion. (15 points)
a. Suppose the central bank conducts an unusually large open market purchase of bonds held by banks of $1400 billion due to a sharp contraction in the economy. Assuming banks hold no excess reserves, after this purchase – what do you predict will be the effect on money supply? (5 points)
b. Suppose the central bank conducts the same open market purchase as in part a, except that banks choose to hold all of these proceeds as excess reserves rather than loan them out, due to fear of a financial crisis. Assuming that currency and deposits remain the same, what happens to the amount of excess reserves, the excess reserve ratio, the money supply, and the money multiplier? (5 points)
c. Go to the St. Louis Federal Reserve Data website, download the following data series, and paste them here: (1) the monthly, seasonally adjusted ‘St Louis Adjusted Monetary Base’ from 01/01/2000 through 03/01/2015 (http://research.stlouisfed.org/fred2/categories/124) and (2) the monthly, seasonally adjusted ‘M2 Money Stock’ for the same time period (http://research.stlouisfed.org/fred2/graph/?g=1858) What trends do you observe in the monetary base, and what trend do you identify in M2? How does this relate to your answer to part b? (5 points)
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