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Chapter 15: Q.7 (page 410)
鈥淭he Fed can perfectly control the amount of reserves in the system.鈥� Is this statement true, false, or uncertain? Explain.
False. Fed ultimately can't control the level of reserves in the system
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Go to the St. Louis Federal Reserve FRED database, and find data on the M1 Money Stock (M1SL) and the Monetary Base (AMBSL).
a. Calculate the value of the money multiplier using the most recent data available and the data from five years prior.
b. Based on your answer to part (a), how much would a million open market purchase of securities affect the M1 money supply today and five years ago?
Using T-accounts, show what happens to checkable deposits in the banking system when the Fed sells $2 million of bonds to the First National Bank.
Suppose that the required reserve ratio is , currency in circulation is billion, the amount of checkable deposits is billion, and excess reserves are billion.
a. Calculate the money supply, the currency deposit ratio, the excess reserve ratio, and the money multiplier.
b. Suppose the central bank conducts an unusually large open market purchase of bonds held by banks of billion due to a sharp contraction in the economy. Assuming the ratios you calculated in part (a) remain the same, predict the effect on the money supply.
c. Suppose the central bank conducts the same open market purchase as in part (b), 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?
d. Following the financial crisis in , the Federal Reserve began injecting the banking system with massive amounts of liquidity, and at the same time, very little lending occurred. As a result, the M1 money multiplier was below 1 for most of the time from October through . How does this scenario relate to your answer to part (c)?
Go to http://www.federalreserve.gov/releases/h6/hist/ and find the historical report of M1 and M2 by clicking on the 鈥淒ata Download Program.鈥� Compute the growth rate of each aggregate over each of the past three years. Does it appear that the Fed has been increasing or decreasing the rate of growth of the money supply? Is this consistent with your understanding of the needs of the economy? Why?
If the Fed sells million of bonds to the First National Bank, what happens to reserves and the monetary base? Use T-accounts to explain your answer.
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