Reference no: EM133060567
Question - Suppose that the required reserve ratio is 12%, excess reserve is $300 billion, excess reserve ratio is 0.2 and currency in circulation is $1200 billion.
(a) Calculate the money supply, and the money multiplier.
Suppose the Central Bank acts as a lender of last resort and lends $1500 billion to two failing commercial banks. Use this information to answer subquestions (b) to (d).
(b) Assuming the ratios you calculated in part (a) remain the same, predict the change of the money supply, and the resulting money supply in the market after the lending.
(c) Suppose now that instead of lending out the money and keeping the ratios constant, the commercial banks instead kept the extra borrowings from the Central Bank as excess reserve instead. Assume that currency and deposits remain the same (while excess reserve and excess reserve ratio change), calculate the new monetary base, money supply, and money multiplier.
(d) Compare your answers of the money supply and money multiplier in parts (b) and (c), and provide intuition.
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