Suppose that the currency-to-deposit ratio is 40 percent and that the excess reserve ratio is 1 percent, whereas the required reserve ratio is 9 percent.
(a) Calculate the effect of an open market sale of $10m on the money supply (M), checkable deposits (D) and currency (C).
(b) How would your predictions change qualitatively if you believed that, for one reason or another, the currency-to-deposit ratio were going to rise? if the excess reserve ratio were to fall? if at the same time the Federal Reserve decreased reserve requirements?
(c) Given the data above (ignoring the complications in (b)), by how much would you want to change the monetary base to increase deposits
(D) by $5m? What would be the effect on currency (C)? the money supply (M)?