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What is the simple deposit multiplier

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Reference no: EM132181293

MONETARY POLICY

1. If the required reserve rate is .125, what is the simple deposit multiplier?

2. Now, assume that the Fed has identified a recessionary gap. What type of monetary policy would you recommend? Be specific as to the three tools that the Fed could use to implement this policy.

3. If the Fed has decided that it needs to change the money supply by $7 million to eliminate the gap, how much in open market operations should it conduct? [Use the simple deposit multiplier you calculated above in Q#1.] Be certain to clearly state the type of open market operations (sale or purchase) and which way the money supply will move (increase or decrease). Show all calculations.

4. Now, suppose the government is going to war and needs to finance some of its war expenditures through treasury obligations (bonds). By how much will the money supply change if the Fed sells $25 million in bonds? Will this be an increase or decrease in the money supply?

5. Show what will happen to the economy as a result of the sale of bonds above? Clearly describe the entire process. [You may want to use a cause-effect chain.] Hint: First, analyze the impact on the money market and then show the impact on the economy with an AS/AD model or TE/TP model. When done, you should have at least 2 graphs (money market + either AS/AD or TE/TP.

If the Fed buys $200 million in bonds and it notices that the money supply increased by $1600 million, what is the required reserve rate?

Reference no: EM132181293

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