Suppose that currency in circulation is $600B, demand deposits are $900B, and excess reserves are $15B. The required reserve ratio is 10%.
a. Calculate the money supply, the currency-deposit ratio, the excess reserve ratio, and the money multiplier.
b. Suppose the central bank conducts an unusually large open market purchase of bonds held by banks of $1,400B due to a sharp contraction in the economy. Assume the ratios you calculated in part (a) remain unchanged, what do you predict will be the effect on the money supply.
c. Suppose the central bank conducts the same open market purchase as in part (b), except that banks choose to hold all of these proceeds as excess reserves rather than loan them out, due to fear of a financial crisis. Assuming that currency and deposits remain the same, what happens to the amount of excess reserves, the excess reserve ratio, the money supply, and the money multiplier?