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Macroeconomics

Chad H

By Chad H
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Chad H Enthusiast

Chad H

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Hey guys,

I am taking a basic Macroeconomics class and am having a problem with one thing. The question is below, anybody that can answer it, please do. I know how to graph it, I just can't remember how the formula goes. Any help is greatly appreciated!

 

"If the federal reserve bank buys 45,000 bonds, how much will this selling of bonds change the money supply by? Will the money supply increase of decrease? "

 

 

Monetary Base=$300,000

Required Reserve Ratio= .20

Excess Reserve=0

Discount Rate=3.0%

Nominal Interest Rate=15%

smujd Enthusiast

smujd

Posted
Posted

Sorry I can't help you out, Chad, but that brings back some fond memories of undergrad econ! Good stuff! :cheers: I'd forgotten all about M1, etc. until you posted that...

 

Bill

Chad H Enthusiast

Chad H

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Hey Bill,

Yeah, it driving me crazy. I thought I had it in my notes but I can't find it! Does anybody know?

diverlloyd Enthusiast

diverlloyd

Posted
Posted
Hey Bill,

Yeah, it driving me crazy. I thought I had it in my notes but I can't find it! Does anybody know?

 

 

 

This reminds me of something NFL coach Jim Mora siad once. . . "You think you know, but you don't know!" :cheers:

smujd Enthusiast

smujd

Posted
Posted

As I recall, the Fed reduces the money supply by selling bonds.

 

You may find the formula here http://faculty.uwb.edu/danby/notes/macrindx.htm (I am too lazy to look).

 

Or try http://www.econ.iastate.edu/classes/econ30...atsion/bht5.htm from which I found:

 

The money supply M is referred to as a monetary policy instrument. Government expenditure G on goods and services, the income tax rate t, government transfer payments F, and government interest payments N on the outstanding government debt are all referred to as fiscal policy instruments. But what does "monetary policy" and "fiscal policy" mean? These government policy options are explained below.

 

Monetary Policy = Changes in DM(T) undertaken by the Fed by

means of open-market operations in period T

(selling government bonds to, or purchasing

government bonds from, the U.S. private

sector or ROW)

 

(6) P(T)[G(T)+F(T)+N(T)] = tP(T)Y(T) + DM(T) + DB(T)

 

No change in No change Changes in DM(T) offset by

G(T)+F(T)+N(T) in t changes in DB(T)

(open market operations)

 

An example of a monetary policy would be an increased Fed sale of government bonds to private banks in each period T from 0 bonds to 2 bonds, at $1000 per bond. Recalling equation (2), and the fact that we are taking the money multiplier to be a given stable value, this results in a decrease in DMb(T), hence in DM(T); for the reserves RES held by private banks are now decreased in each period T by the $2,000 that private banks now pay to government in exchange for bonds. This decrease in DM(T) is offset by an increase in DB(T) by $2,000 in each period T because the number of government bonds held by the private sector in each period T now increases by 2, and each bond is worth $1000.

 

Is that what you're looking for--don;t really recall macro all that well...

 

Bill

Chad H Enthusiast

Chad H

Posted
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Well, kinda but the above is all the information I have. None of those pages has that from what I can find. I know its a simple formula, I just can't find it.

Guest chevydeerhunter

Guest chevydeerhunter

Posted
Posted

Higher taxes are not good.

 

 

BTW, thanks for making me feel as dumb as I look! :nono:

smujd Enthusiast

smujd

Posted
Posted
Well, kinda but the above is all the information I have. None of those pages has that from what I can find. I know its a simple formula, I just can't find it.

 

 

 

 

That's kind of what I figured. Sorry, Dude.

 

Bill

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