Pursuing an expansionary monetary policy

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You may have heard from the news some commentators saying that the Federal Reserve, when pursuing an expansionary monetary policy, engages in "helicopter money." That is, it is as if the Federal Reserve drops 1,000 of newly printed $1 bills. Let us suppose this is the case. Calculate by how much the supply of money will increase for each of the following scenarios.

1) All the new bills are held by the public.

2) All the new bills are deposited in banks (that is, held as demand deposits). Banks hold 20 percent of deposits as reserves, and there are no excess reserves.

3) People hold equal amounts of currency and demand deposits. Banks hold 20 percent of deposits as reserves, and there are no excess reserves.

Reference no: EM131095189

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