What exacerbated the Panic of 1907? Hard-pressed banks were unable to increase the volume of money in circulation while others were reluctant to lend to them. Major financial institutions in New York were reluctant to release money to shore up the banking system. The run on gold a decade prior drained the U.S. Treasury of available funds that could have been used for economic stimulus.
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This exacerbated the Panic of 1907 by creating a shortage of available funds for banks to meet their obligations and lend to businesses and individuals. Show more…
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1. From 1929 to 1933 in the United States during the Great Depression, the ratio of currency to checkable deposits (transaction accounts) increased from 18% to 35%, and the ratio of bank reserves to checkable deposits increased from 15% to 19%, and the supply of M1 (currency plus checkable deposits) decreased from 26 billions of dollars to 20 billions of dollars. (The numbers are different from those in the lecture because we used M2 (M1 plus saving and small time deposits) in the lecture.) (a) How did the M1 money multiplier change from 1929 to 1933? (b) How many billions of dollars was the supply of monetary base (currency plus reserves) in 1929 and 1933 respectively? (c) In order to maintain M1 constant from 1929 to 1933 against the above change in the currency-deposit ratio and the reserve-deposit ratio, how many additional billions of dollars of monetary base the Fed should have supplied in 1933? Assume that the money multiplier is not affected by the additional supply of monetary base. (d) Why did the Fed fail to supply enough monetary base? Explain briefly also possible reasons why the Great Depression became a world-wide phenomena.
Akash M.
In response to problems in financial markets and a slowing economy, the Federal Open Market Committee (FOMC) began lowering its target for the federal funds rate from 5.25 percent in September 2007 . Over the next year, the FOMC cut its federal funds rate target in a series of steps. Economist Price Fish back of the University of Arizona observed, "The Fed has been pouring more money into the banking system by cutting the target federal funds rate to 0 to 0.25 percent in December 2008 " What is the relationship between the federal funds rate falling and the money supply increasing? How does lowering the target for the federal funds rate "pour money" into the banking system?
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The money multiplier declined significantly during the period $1930-1933$ and also during the recent financial crisis of $2008-2010$. Yet the M1 money supply decreased by $25 \%$ in the Depression period but increased by more than $20 \%$ during the recent financial crisis. What explains the difference in outcomes?
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