What is the money multiplier and money supply

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Assume that the banking system has total reserves of $200 billion. Assume also that the reserve ratio is 40 percent and that there is no currency in this economy.
a. What is the money multiplier? What is the money supply?

b. Suppose the Fed then raises legal reserve requirements and causes the reserve ratio to increase to 50 percent of deposits. What is the new value of the money multiplier? What is the change in the money supply?

2. Suppose that nominal GDP is $8,000 billion, the GDP deflator has a value of 2, and velocity is 4. Also assume that velocity does not change over time.
a. What is the value of real GDP? How big is the nominal money supply?

b. If the Federal Reserve wants to keep the annual inflation rate constant at 1 percent, and the average growth rate of real GDP over time is 3 percent per year, how fast should the money supply grow on average over time to achieve the target inflation rate?

Reference no: EM13223098

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