Answer to Question #226528 in Macroeconomics for Manfred Hailume

Question

In the economy of Brightland, the commercial banks have deposits of $600 billion. Their reserves
are $60 billion. All reserves are in deposits with the Central Bank and the commercial banks hold
no excess reserves. There is $120 billion in Central Bank notes outside the banks, and there are no
coins. (5 marks each)
a) What is the economy's monetary base?
b) What is the quantity of money in the economy?
c) Calculate the money multiplier.
d) Suppose the Central Bank of Brightland undertakes an open market purchase of securities of
so that the monetary base increases by $5 billion. By how much will the quantity of money change?

Answer 1

Money in the Economy

Q1. The monetary economic base is the total amount of a currency in circulation in the hands of the general public or in the form of commercial bank deposits held in the central bank's reserves. The monetary basis is typically divided into two parts: money in circulation and bank reserves (Jayaraman & Ward, 2019). The monetary base is also important, as many central banks enhance the economic base by purchasing government bonds. Open market operations are another name for this. All central banks will make an effort to maintain a consistent supply of money or cash by adopting monetary policy to preserve the monetary base.

In this example, the monetary basis is $120 billion plus $60 billion, for a total of $180 billion.

Q2.

The amount of money in circulation in the economy. The total quantity of money in the economy also has an assumption that the total amount of money in the economy has a major impact on the level of economic activity in that economy. In addition, the Federal Reserve is normally in charge of determining the amount of monetary supply. The money supply, which is the amount of financial assets available in the economy, is also related to the quantity of money; information about the money supply is frequently documented and disseminated because it always impacts the price level. The amount of inflation and exchange rates are also affected. When the money supply is increased, the value of money normally decreases. This is because an increase in the money supply leads to a rise in inflation (Kruisbergen et al.,2015).

The amount of money equivalent to notes plus deposits, which is $120 billion dollars = $600 billion dollars = $720 billion dollars Q3.

The money multiplier is one of the many closely assessed ratios of commercial banks in economics. Because it influences the money supply for the entire economy, the money multiplier is extremely important. When used, a multiplier can also refer to an economic party that magnifies the effect of another consequence. Under reserve banking, money is transferred from the private sector to the central bank. The bank would save and lend less if it had more capital to maintain in reserve. As a result, the money multiplier is inversely proportional to the known reserve ratio ( Kruisbergen et al.,2015). The money multiplier is 1/s, and the required reserve ratio is si. The needed balance is $60B/$600B=0.1 because there are no excess reserves.

So, 1/0.1 =10 Q4 is the money multiplier.

Assume that the central bank of Bright Land purchases securities on the open market, increasing the monetary base by $5 billion.

The following is about to happen.

The money multiplier multiplies the change in the monetary base to increase the amount of money in the economy. As a result, the total amount of money increases by $5Bx10=$50B.

References

Kruisbergen, E. W., Kleemans, E. R., & Kouwenberg, R. F. (2015). Profitability, power, or proximity? Organized crime offenders are investing their money in the legal economy. European Journal on Criminal Policy and Research, 21(2), 237-256.

Jayaraman, T. K., & Ward, B. D. (2019). Is the money multiplier relevant in a small, open economy? Empirical evidence from Fiji.