1. Milton Friedman believed the Fed should control the money supply precisely. In the 1960s, he proposed that the required reserve ratio be raised to 100 percent. How would this policy improve control of the money supply? What are the drawbacks to the policy?
A. This policy would somewhat improve control of the money supply with no other drawbacks.
B. This policy would somewhat improve control of the money supply with the drawback that banks would not be able to give loans.
C. This policy would give the Fed perfect control over the money supply with no other drawbacks.
D. This policy would give the Fed perfect control over the money supply with the drawback that banks would not be able to give loans.
2. In the text, we ignored traveler's checks in deriving the money multiplier. Suppose we are more careful and include traveler's checks in the money supply. Let T be the level of traveler's checks, so T/D is the ratio of traveler's checks to checking deposits. Derive the money multiplier in terms of C/D, R/D, and T/D.
A. m = (C/D+ 1 + T/D)/(C/D + T/D)
B. m = (C/D+ 1)/(C/D + R/D)
C. m = (C/D+ 1 + T/D)/(T/D + R/D)
D. m = (C/D + 1 + T/D)/(C/D + R/D)