1) Pretend you are in charge of conducting monetary policy at the New York Fe and you have the following initial conditions:
rr/D = .10
C = 900 b
D = 1800 b
ER = 0
M = C + D
Given the above information (show all work on your homework sheet)
i) calculate the MB
ii) Calculate the money multiplier (mm)
iii) What is the money supply (use MS = mm * MB)?
2) If Rsub d = 240 - 30 i sub ff, given the information above, what is the market clearing federal funds rate? Assume that this i the target for the federal funds rate (Show all work). Note - to calculate the market clearing federal funds rate, you first need R sub s. R sub s is made up of required reserves and excess reserves. Here ER = 0 so to find R sub s, take the value for rr/D and multiply it by the value for D. Then you will be able to solve for the market clearing federal funds rate.
Draw a reserve market diagram depicting exactly what is going on here. Label the equilibrium point as point A.
3) Suppose that for whatever reason, reserve demand changes and you forecast the reserve demand to now be R sub d = 270 - 30 i sub ff. In order to keep the federal funds rate at a target, what must the open market desk do? Be specific and show this development in your picture on your homework sheet (label new equilibrium as point B)
4) Suppose the alternative, that the open market desk does nothing different, that is, they hold the amount of reserves constant. What happens in the reserve market? What is the market clearing fed funds rate now? Label this development, that is, the new equilibrium as point C. Show all work