Quantitative easing by completing purchase of government

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Reference no: EM1319491

Q. The Fed announced in April 2011 to it will continue the ‘quantitative easing' by completing the purchase of government securities by the amount of $60 billion. Assume to the monetary base that 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 also on possible defaults, elucidate 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 also trade. Assume to 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 also in June 2011.

(b) Based on the description given above, compute the money supply in June 2010 also in June 2011.

Reference no: EM1319491

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