Assume the following money supply information and use as needed for all parts of this problem.
Currency in circulation (CU, in $) 75
Deposits (D, in $) 200
The required reserve ratio (rr, in %) rr = 0.
High-powered money (monetary base, B, in $) 102
Using the information given, what is the value of the money multiplier, m?
What is the level of the M1 stock of money?
Suppose the public’s holding of currency increases to $100 while, at the same time, the level of deposits remain constant at $200.
What is the value of the new money multiplier (m’)? If the FED wishes to hold the M1 supply of money equal to the value obtained in Part (ii) above, by how much must the FED change the monetary base (?B), and in which direction, as a result of the newmoneymultiplier (m’)?
Through the application of Okun’s Law, if the FRED reduces the money supply by 5 percent and the quantity theory of money is true, then by how much would you predict the unemployment rate to change in the short-run? Continuing with this situation, by how much would you predict the unemployment rate to change in the long-run (compared to its original short-run level)?