fore, if new loans add to the deposits, together with the initial deposit of 1M, the total deposit creation will be a multiple of the initial deposit such that D Deposits=(1/RR)*D Reserves (or Initial Deposit).Shock 2: Suppose Aunt Seema dies in Sierra Madre (another country!) and leaves an inheritance to Lucky Tom in Granada a wonderful amount of $1M. (So that he does not have to search under his mattress.). Initial Money Supply=$1M (CC-under the mattress)+$10M(Deposits). He happily takes it to a bank in Granada.Again, the new deposit creation will be $10M (extra). But this time, the money supply will go up from $11M to $21M as the new deposits were not drawn out of circulation but transferred from abroad.Shock 3: Suppose that the Central Bank of Granada conducts an Open Market operation purchasing G-Bonds from the Banking System in the amount of $1M, what will be the effect on the Money Supply if banks loan out all of their excess reserves? Will there be a contraction or an expansion in the Money Supply? Show your calculations.Shock 4: Suppose that the CB increases the RRR from 10% to 20%. What is the impact on the money supply if a) banks sell their G-bonds to meet the new RRR, b) banks call in loans to meet the new reserve ratio?Shock 5: Treasury issues T-Bills in the amount of $1M to finance government deficits and the public draws from its deposit funds in the banking system to pay for the proceeds. Shock 6: Treasury sells securities to the CB in the amount of $1M and the CB pays for these securities by creating new notes (Monetization of Deficits). ...
