Question

Suppose that: r= required reserve ratio = 0.10 c = {C/D} = currency ratio = 0.30 e = {ER/D} = excess reserve ratio = 0.01 MB = the monetary base = $3,000 billion 1 + c Given that the formula for the money multiplier is ( (1+ c) / (r+ e + c)) find the value for M, the money supply. The money supply is $....... billion. (Round your response to the nearest whole number.) Use the money multiplier to find the new value for the money supply if open market operations increase the monetary base by $200 billion. The money supply is now $...... billion. (Round your response to the nearest whole number.)

Answer 1

To find the money supply using the money multiplier formula, we can plug in the given values for r, c, and e. The money supply is initially $3.17 billion. If the monetary base is increased by $200 billion, the new money supply is $10,144 billion.

Step-by-step explanation:

To find the value for M, the money supply, we can use the money multiplier formula: (1 + c) / (r + e + c). Plugging in the given values: r = 0.10, c = 0.30, and e = 0.01:

M = (1 + 0.30) / (0.10 + 0.01 + 0.30) = 1.30 / 0.41 = 3.17

Therefore, the money supply is $3.17 billion (rounded to the nearest whole number).

If open market operations increase the monetary base by $200 billion, we need to calculate the new value for the money supply. We can use the same money multiplier formula, but with the new monetary base:

M' = [(1 + 0.30) / (0.10 + 0.01 + 0.30)] * [3000 + 200] = 1.30 / 0.41 * 3200 = 3.17 * 3200 = 10,144

Therefore, the new money supply is $10,144 billion (rounded to the nearest whole number).