Reference no: EM131095188
Let us suppose for the United States that, currently, the monetary base is $100 billion, the currency-deposit ratio is c = 50%, the excess reserves-deposit ratio is e = 1%, and the reserve-deposit ratio (or reserve requirement ratio) is r = 8%.
1) Calculate the supply of money.
2) All things being equal, if the Federal Reserve pursues a contractionary monetary policy, raising the reserve requirement ratio to 10%, what happens to the supply of money?
3) All things being equal, if people have greater preference to hold cash, leading to a currency deposit ratio of 70%, what happens to the supply of money?
4) All things being equal, if banks are extremely cautious about lending, leading to an excess reserves-deposit ratio of 90%, what happens to the supply of money?
5) What do your answers to questions 3) and 4) tell you about the ability of the Federal Reserve to control the supply of money? Precisely explain in at most two sentences.
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