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Money Multipliers

Chapter 27 # 1
Calculate the money multipliers below:
a) Assuming individuals hold no currency, calculate the simple money multiplier for each of the following: 5%, 10%, 20%, 25%, 50%, 75%, 100%.
If individuals hold no cash, the simple money multiplier is the reciprocal of the reserve requirement. Thus for the following reserve requirements the simple multiplier is found by dividing the requirement percentage into 1:
5% - it is 1/5% = 20
10% - it is 1/10% = 10
20% - it is 1/20% = 5
25% - it is 1/25% = 4
50% - it is 1/50% = 2

b) Assuming individuals hold 20 percent of their money in the form of currency, recalculate the approximate real-world money multipliers in a. ( I need help with this one)

Chapter 27 # 3

Categorize the following as components of M1, M2 both or neither.
a) State and local governments bonds.
b) Checking accounts
c) Money market mutual funds.
d) Currency
e) Stocks
f) Corporate bonds
g) Traveler's checks

Chapter 27 # 4
For each of the following, state whether it is considered money in the United States. Explain why or why not.
a) A check you write against deposits you have at Bank USA.
b) Brazilian reals.
c) The available credit you have on your MasterCard.
d) Federal Reserve notes in your wallet.
e) Gold bullion
f) Grocery store coupons

Chapter 27 # 5
State the immediate effect of each of the following actions on M1 and M2:
a) Barry writes his plumber a check for $200. The plumber takes the check to the bank, Keeps $50 in cash, and deposits the remainder in his savings account.
b) Maureen deposits the $1,000 from her CD in a money market mutual fund.
c) Sylvia withdraws $50 in cash from her savings account.
d) Paulo cashes a $100 traveler's check issued in his Ohio bank at a New York Bank.

Chapter 28 # 1
Demonstrate the effect of expansionary monetary policy in the AS/AD model when the economy is:
a) Below potential output.
b) Significantly above potential output.

Please label the answers to the corresponding exercise.

Solution Preview

Chapter 27 # 1
Calculate the money multipliers below:
a) Assuming individuals hold no currency, calculate the simple money multiplier for each of the following: 5%, 10%, 20%, 25%, 50%, 75%, 100%.
If individuals hold no cash, the simple money multiplier is the reciprocal of the reserve requirement. Thus for the following reserve requirements the simple multiplier is found by dividing the requirement percentage into 1:
5% - it is 1/5% = 20
10% - it is 1/10% = 10
20% - it is 1/20% = 5
25% - it is 1/25% = 4
50% - it is 1/50% = 2

b) Assuming individuals hold 20 percent of their money in the form of currency, recalculate the approximate real-world money multipliers in a. ( I need help with this one)
As the multiplier is found when individuals hold no cash by dividing the requirement percentage into 1, now since 20% of the money is held in the form of currency, the number we need to divide the requirement percentage is (1 - 0.2) (remember 20% is 0.2) = 0.8. So we have,
5% - it is 0.8/5% = 16
10% - it is 0.8/10% = 8
20% - it is ...

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