Name Date last 4 PSU ID Economics 304WD Homework Lesson 7 The Fed and the Money Supply 80 points 1 5 What is the equation for the more realistic money multiplier 2 In the economy the following statistics describe the money supply C 1 250b R 125b D 1 500b Given these data calculate the following to whole numbers unless noted otherwise a 5 Monetary Base BASE BASE b 5 Money Supply M M c 5 Ratio of reserves to deposits res carry out to four decimals res d 5 Ratio of currency to deposits cu carry out to four decimals cu e 5 Money Multiplier mm carry out to four decimals mm 1 Now suppose a shock causes banks to change the amount of reserves they hold relative to deposits so that res changes to 0 0694 Suppose that when this happens both cu and BASE do not change However the change in res will affects mm M C R and D Calculate the following a 5 Money Multiplier mm carry out to four decimals mm f 5 Money Supply M M g 5 Bank Deposits D D h 5 Currency held by the public C C i 5 Bank Reserves R R 3 10 What is a liquidity trap What were the three unusual policies measures from 2009 to 2012 the Fed undertook to get the US economy out of the liquidity trap 4 From your textbook 2 Just as banking panics led to a decline in the money multiplier during the Great Depression a worldwide financial panic similarly caused the money multiplier to decline in 2008 Below you will find a graph of the currency deposit ratio cu and the reserve deposit ratio dep from the Great Depression a 5 How were the changes in the currency deposit ratio cu different during the Great Recession than depicted above during the Great Depression Explain why this was the case b 5 How were the changes in the reserve deposit ratio res different during the Great Recession than depicted above during the Great Depression Explain why this was the case c 5 What was different about the Federal Reserve s actions after the Great Recession than their actions after the Great Depression 3