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Chapter 15: Q.25 (page 348)

In Problem 15-24, what would be the amount of the potential money multiplier that applies to a 100,000$ decrease in reserves caused by a Fed open market sale of that amount? How much would the money supply potentially decrease as a result of this sale?

Short Answer

Expert verified

The amount of the potential money multiplier will be 10.

The money supply potentially decreases as a result of this sale will be$1million.

Step by step solution

01

introduction

In each progressive round, cash supply increments by a more modest sum than it did in the past round. All in all, the cash supply grows at a diminishing rate. Consequently, the bend portraying development in cash supply is up slanting and sunken in shape.

02

explanation 

From the figure that assuming the Federal Reserve infuses $100000into the financial framework through an open market buy, the cash supply in the economy extends by $1million.

Now, change in excess reserves be denoted by△ERand the resultant change in money supply be△Msthen,

role="math" localid="1651583423676" MoneyMultiplier=ΔMsΔER=1000000100000=10
03

explanation

The money supply potentially decreases as a result of this sale

Now,ΔMs=MM×ΔERΔMs=10×−100,000=-1000000

The money supply potentially decreases as a result of this sale will be$1million.

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Most popular questions from this chapter

Determine the maximum potential extent that the money supply will change following a Federal Reserve monetary policy action.

Identify whether each of the following events poses an adverse selection problem or a moral hazard problem in financial markets.

a. A manager of a savings and loan association responds to reports of a likely increase in federal deposit insurance coverage. She directs loan officers to extend mortgage loans to less creditworthy borrowers.

b. A loan applicant does not mention that a legal judgment in his divorce case will require him to make alimony payments to his ex-wife.

c. An individual who was recently approved for a loan to start a new business decides to use some of the funds to take a Hawaiian vacation.

How do you suppose that the willingness of European banks to make adjustable-fate mortgase loans has been affected by the desrease in interest rates that they eam?

Identify whether each of the following amounts is counted in M1 only, M2 only, both M1and M2, or neither.

a. \(50billion in U.S. Treasury bills

b. \)15billion in small-denomination time deposits

c. \(5billion in traveler's checks not issued by a bank

d. \)20billion in money market deposit accounts

Draw an empty bank balance sheet, with the heading "Assets" on the left and the heading "Liabilities" on the right. Then place the following items on the proper side of the balance sheet.

a. Borrowings from another bank in the interbank loans market

b. Deposits this bank holds in an account with another private bank

c. U.S. Treasury bonds

d. Small-denomination time deposits

e. Mortgage loans to household customers

f. Money market deposit accounts
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