he Fed announced in April 2011 that it will continue the ‘quantitative easing' by completing the purchase of government securities by the amount of $60 billion. Suppose that the monetary base, which is equivalent to the sum of all the initial deposits in the banking system, has risen from $1 trillion in June 2010 to $1.6 trillion in June 2011. Due to the concern on the state of the economy and on possible defaults, however, the reserve ratio of commercial banks has risen, too. In other words, commercial banks held onto more cash reserves than before, instead of extending the loans to households and business. Suppose that the reserve ratio has risen from 0.1 in June 2010 to 0.2 in June 2011. Again, the numbers given in this question are hypothetical, not real.
(a) Based on the description given above, compute the money multiplier in June 2010 and in June 2011.
(b) Based on the description given above, compute the money supply in June 2010 and in June 2011.