An economy has a monetary base of 100$ bills. People hold equal amounts of currency and demand deposits. Banks has 20% of deposits as reserves. a. What is the money multiplier? Compute the money supply. b. The central bank decides to increase the money supply by 10%. How much should it increase the monetary base?
An economy has a monetary base of 100$ bills. People hold equal amounts of currency and demand deposits. Banks has 20% of deposits as reserves. a. What is the money multiplier? Compute the money supply. b. The central bank decides to increase the money supply by 10%. How much should it increase the monetary base?
Chapter1: Making Economics Decisions
Section: Chapter Questions
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Transcribed Image Text:4. Consider a classical economy described as follows:
1 1
Y = LK², where L is the amount of labor and K is the amount of capital. The economy
has 10,000 units of labor and 10,000 units of capital.
Consumption (C): 5,020-100r, Investment (I): 2,000-100r, Taxes (T): 2,500, Government
Purchases (G) :3,000
a. Compute the total production and find the equilibrium interest rate.
b. Compute private saving, government saving, and national saving.
c. Now suppose that G is reduced by 10. Find the new equilibrium interest rate. What
happens to consumption, private saving, government saving, national saving and
investment?
5. An economy has a monetary base of 100$ bills. People hold equal amounts of currency
and demand deposits. Banks has 20% of deposits as reserves.
What is the money multiplier? Compute the money supply.
b. The central bank decides to increase the money supply by 10%. How much should it
increase the monetary base?
a.
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