As a response to inflation, in March 2022, the Federal Reserve approved its first interest rate hike since December 2018. However, inflation still remained very high and piked in June 2022. The last time inflation ran that high was in the 1980s. To bring down inflation, the Fed implemented the more restrictive monetary policy and approved another interest rate hikes of 0.75 percent in November 2022. Even a bank crisis occurred in the first quarter (Q1) of 2023, the Fed still kept a restrictive monetary policy with the target federal funds rate at a range of 4.75% to 5%.

(1) Suppose, we know total money supply (M) in the current year equals $24,000 billion, and monetary base (B) is $6,000 billion. The currency deposit ratio (cr) is 0.2 (or 20%). With the information, calculate the values of currency (C), deposit (D), reserves (R), reserve deposit ratio (rr) and money multiplier (m) in this year?

Note: you need to show your step-by-step solutions for full credit.

(2) Due to the pressure of high inflation, suppose the Fed aims to lower total money supply (M) by 10% (or as 90% of the current level) by the end of next year. In order to achieve this target, the Fed decides to double the current reserve deposit ratio (rr). The currency deposit ratio (cr) remains at the same level of 0.2. Given the new M and rr, calculate the values of currency (C), deposit (D), reserves (R), reserve deposit ratio (rr) and money multiplier (m) in next year.

Note: the current (original) values of M and rr are from (1) as above.

Note: you need to show your step-by-step solutions for full credit.

Answer rating: 100% (QA)

1 Calculation of currency C deposits D reserves R reserve deposit ratio rr and money multiplier m in ... View the full answer