Macroecon

posted by .

Part I
Consider a world in which there is no currency and depository institutions issue only checkable deposits and desire to hold no excess reserves. The required reserve ratio is 20 percent. The central bank sells $1 billion in government securities. What happens to the money supply? Give reasons to support your answer.

Part II
Some economists argue in favor of abolishing the government-sponsored deposit insurance.
Do you agree or disagree with this argument? Write a well-reasoned argument defending your stance.
If deposit insurance were abolished, explain how would this change the incentive structure facing depository institutions?

  • Macroecon -

    I) The money multiplier is 1/rr. In this proplem 1/.2=5. (For more info on the money multiplier, see www.wikipedia.org/wiki/Money_creation#Money_multiplier)
    Since the central bank is selling securities, the public is buying using their demand deposits. I say the money supply goes down by $5B.

    II) Take a shot, what do you think. (hint: strong arguments can be made for both keeping the insurance and eliminating the insurance. You may need to do a little research)

Respond to this Question

First Name
School Subject
Your Answer

Similar Questions

  1. Reserves-PLEASE HELP!

    The Norfolk Bank has $18,000 in excess reservces and the reserve ratio is 20 percent. Which level of checkable deposits and reserves might this bank hold?
  2. Economics

    1. Suppose that the money supply is currently $500 billion and Fed wishes to increase it by $100 billion. Given a reserve ratio of 0.25 what should it do?
  3. Macroeconomics

    If it looks like a bank won't meet the Federal Reserve Bank's reserve requirement, normally it will first turn to the: A) other member banks and borrow at the federal funds rate. B) Fed and borrow at the discount rate. C) open market …
  4. Macroeconomics

    A bank has issued 4 billion in transactions deposits and 2 billion in time deposits and other nontransactions deposits. Its other liabilities and net worth equal 1 billion. The bank has 100 million in total reserves. The only reserve …
  5. economics

    3. Draw a simple T-account for First National Bank which has $5,000 of deposits, a required reserve ratio of 10 percent, and excess reserves of $300. Make sure you balance sheet balances
  6. Principal of Finance

    The following information is available to you: travelers' checks = $1 million; coin and paper currency = $30 million; repurchase agreeĀ¬ ments and Eurodollars = $15 million; demand deposits = $25 million; retail money market mutual …
  7. econ

    Suppose the reserve requirement ratio is 20 percent. Assuming no bank holds excess reserves and nobody withdraws cash, a $10,000 injection of new excess reserves by the Fed can create A) $2,000 in new checkable deposits B) $10,000 …
  8. Finance

    A new bank has vault cash of $1 million and $5 million in deposits held at its Federal Reserve District Bank. a. If the required reserves ratio is 8 percent, what dollar amount of deposits can the bank have?
  9. Finance

    Assume a bank has $5 million in deposits and $1 million in vault cash. If the bank holds $1 million in excess reserves and the required reserves ratio is 8 percent, what level of deposits are being held?
  10. FIN 100

    P5: The following information is available to you: travelersā€™ checks = $1 million; coin and paper currency = $30 million; repurchase agreements and Eurodollars = $15 million; demand deposits = $25 million; retail money market mutual …

More Similar Questions