Calculate the currency-to-deposit ratio (cr), and the money multiplier (m) given the following values:
rr = 0.
20 C = $320 billion D = $1,000 billion
Calculate total required reserves (RR), total actual reserves (AR) and the monetary base (MB).
Now assume the FED lowers the required reserve ratio to 0.
Calculate the new money multiplier (mm’) and the new money supply (M1).
Calculate the new level of deposits (D’) and currency in circulation (C).
Calculate the new level of required reserves (RR’) and excess reserves (ER’).
Consider an economy with no income taxes, and where the mpc (c) = 0.
What is the value of the multiplier associated with autonomous spending?
How much will output in this economy change if government expenditures are decreased by$500?
How much will output in this economy change if government transfers are decreased by $500?
What explains the difference in your answers (if any) between part (b) and part (c) of this problem?
Now suppose that in the economy described in problem #9 above the government imposes a proportional income tax, t = 1/4 (or, t = 0.
25) and the mpc remains 0.
What is the value of the multiplier now?
How much will output in this economy change if government spending decreases by $500?
How will the change in government spending in this model affect the budget surplus or deficit(that is, what is the change in BD or BS) due to the $500 decrease in government spending?