M&B3 3rd Edition by Dean Croushore

Exercise 2

Consider the following balance sheet of Princeton Bank:
Balance Sheet for Princeton Bank (amounts in millions of dollars)

Of Princeton Bank's reserves, $6 million are required clearing balances held at the Federal Reserve Bank of Philadelphia. Statistics for the economy as a whole are
billion
billion
ratio of currency to transactions deposits
ratio of nontransactions deposits to transactions deposits
ratio of retail money-market mutual funds to transactions deposits
q
0.08
8 percent
required reserve ratio on transactions deposits
RR/D
ratio of required reserves to transactions deposits
RCB/D
0.02
2 percent
ratio of required clearing balances to transactions deposits
a Calculate the monetary base MB , M1, and M2. Are there any excess reserves in Princeton Bank Are there any excess reserves in the economy as a whole
b Calculate the multipliers for M1 and M2.
c Calculate the values of N , D , C , R , MMF , and RCB using the fact that
and
.
d Suppose that the Fed raises the reserve requirement on transactions deposits to 0.18
18 percent. What happens to Princeton Bank's balance sheet Does it have excess reserves, or is it short of reserves Calculate the new M1 and M2 multipliers. What happens to MB , M1, M2, N, D, C , MMF , RCB , and R
e Suppose that instead of raising the reserve requirements as in part c, the Fed sells $150 billion of securities in the open market, including $30 million to a customer of Princeton Bank. What happens to Princeton Bank's balance sheet Does it have excess reserves, or is it short of reserves Calculate the new M1 and M2 multipliers. What happens to MB , M1, M2, N, D, C , MMF , RCB , and R