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Leakage Adjusted Money Multiplier

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Suppose the ratio of deposits that banks hold in the form of reserves is 7 percent. Suppose further that people want to hold 8 percent of their deposits in the form of cash. Then, if the fed wants the money supply to be $6,228 billion, what is the necessary level of high powered money?

Assume an economy in which the reserve ratio is 15 percent, people hold 10% of their deposits in the form of cash, and there are no other leakages. (a) Compute the value of the money multiplier. (b) If the current level of high-powered money is $1,500 billion, what is the money supply in this economy? (c) How much does the money supply change if the fed buys $30 billion of U.S. government treasury bills from a government bond dealer? How about if banks borrowings of reserves from the fed decline by $6 billion? (d) if the fed set a target money supply of $6,424 billion what would it have to do to achieve that target?

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The first thing you need for this is to define the leakage adjusted money multiplier.

Assume the required reserve ratio is r, the banks' propensity to hold excess reserve, as a fraction of total reserves is e and borrowers' tendency to hold cash, as a fraction of cash is c. Then,

the leakage-adjusted money multiplier = 1/(r+e+c)

In this case banks do not have a tendency to hold excess cash, and hence e = 0. The required reserve ratio in the first case is 7%, and the borrowers' tendency to hold ...

Solution Summary

The leakage adjusted money multiplier is explained with calculations in 372 words.

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under conditions of Keynesian aggregate supply.

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C = 1.15 + .75 ( Y - T).
The tax function is:
T = 0.1Y + .1
Planned investment is $1 billion, and planned government expenditures are
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Calculate:
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b. Consumer expenditure
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e. The government budget deficit
f. The leakages from and injections in to the circular flow of income and
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C = 1.7 + .8 (Y - T)
T = .1Y +.2
IM = .06 + .1Y
Planned investment is $2 billion, planned government expenditures are $ 1
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Calculate:
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b. The investment multiplier
c. The autonomous tax multiplier
d. The marginal tax rate multiplier
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f. Net export
g. The change in GDP resulting from a $ 1 billion rise in government
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i. In problem (g) the changes in saving, consumer expenditures and
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C = 180 + .08 Yd
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Ms = 5400
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a. Write down the equation of IS curve.
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a. Use the IS-LM model to show that in an economy which is subject to
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See attached file for full problem description.

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