d. What is the impact on the interest rate if central bank money is increased to $300 billion? e. Ifthe overall money supply increases to $3,000 billion, what will be the impact on i? [Hint: Use what you discovered in part (c).]
d. What is the impact on the interest rate if central bank money is increased to $300 billion? e. Ifthe overall money supply increases to $3,000 billion, what will be the impact on i? [Hint: Use what you discovered in part (c).]
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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answers for question d and e
![2. The money multiplier
The money multiplier is described in Section 4-4. Assume the following:
i. The public holds no currency.
ii. The ratio of reserves to deposits is 0.1.
iii. The demand for money is given by
M =SY(8 – 4i)
Initially, the monetary base is $100 billion, and nominal income is $5 trillion (i.c.
$5000 billion).
a. What is the demand for central bank money? (Write down an expression for the
demand for central bank money)
b. Find the equilibrium interest rate by setting the demand for central bank money
equal to the supply of central bank money.
c. What is the overall supply of money? Is it equal to the overall demand for money
at the interest rate you found in part (b)?
d. What is the impact on the interest rate if central bank money is increased to $300
billion?
e. If the overall money supply increases to $3,000 billion, what will be the impact on
i? [Hint: Use what you discovered in part (c).]](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fe3a0be4f-4303-44d7-80da-4fbf8856a87b%2F00fd4341-8309-460e-80f3-cc97e1af5a62%2Fi70y7uh_processed.jpeg&w=3840&q=75)
Transcribed Image Text:2. The money multiplier
The money multiplier is described in Section 4-4. Assume the following:
i. The public holds no currency.
ii. The ratio of reserves to deposits is 0.1.
iii. The demand for money is given by
M =SY(8 – 4i)
Initially, the monetary base is $100 billion, and nominal income is $5 trillion (i.c.
$5000 billion).
a. What is the demand for central bank money? (Write down an expression for the
demand for central bank money)
b. Find the equilibrium interest rate by setting the demand for central bank money
equal to the supply of central bank money.
c. What is the overall supply of money? Is it equal to the overall demand for money
at the interest rate you found in part (b)?
d. What is the impact on the interest rate if central bank money is increased to $300
billion?
e. If the overall money supply increases to $3,000 billion, what will be the impact on
i? [Hint: Use what you discovered in part (c).]
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