Question

You are hired by the Chair of the Federal Reserve to manage the trading desk at the New York Fed and the Chair tells you that he wants you to increase the money supply (M1) by 33.33 percent. They warn you to be careful because in these uncertain times, the money multiplier tends to become very unstable. They suggest that you stay ‘closely connected’ with the banking sector and then gives you a list of phone numbers to do so. Note that in this problem we are targeting the growth rate of M1. Reserve Market Initial Conditions (Scenario A) rr/D= .10 C = 500 billion D = 2000 billion ER = 0 (not a typo) M = C + D Use the initial conditions IN SCENARIO A above to answer #1-3. What is the MB?

Answer 1

Answer:

700

Explanation:

The Monetary Base is a mixture of circulation currency and commercial bank deposits retained in central bank reserves.

The computation of Monetary Base is shown below:-

$MB = C + RR + ER$

$= C + (RR\times D) \times ER$

Where ER = Excess reserve

RR = Required reserve

C = Circulation Currency

D = Demand deposits

Now, we are placing these values to the above formula:

$= 500 + (0.10\times 2,000)$

= 500 + 200

= 700

Therefore for computing the Monetary Base we simply applied the above formula.