In the hypothetical country of Middlelandia, banks are required to hold 20% of checkable deposits as reserves, and the public holds none of the loans as currency in circulation and redeposits all of the loans. Complete the table (calculations should be to no more than two decimal places). Round Deposits Required Reserves of 20% Excess Reserves New Loans None of loan proceeds are held as currency in circulation by people Loan proceeds redeposited 1 $500 2 3 4 5 6 7 8 9 10 Totals Calculate the new money supply. Calculate the money multiplier.
IS-LM-PC Analysis
The IS (Investment Saving), LM (Liquidity Preference- Money Supply), and PC (Philips Curve) is the model that looks at the dynamics of output and inflation. It takes into account the central bank policy decision to adjust the inflation and real interest rate in the economy. It enables the economist to weather to priorities between employment and inflation rate analyzing the model. It is a practice-driven approach adopted by economists worldwide.
IS-LM Analysis
The term IS stands for Investment, Savings, and LM stands for Liquidity Preference, Money Supply. Therefore, the term IS-LM model is known as Investment Savings – Liquidity preference money Supply. This model was introduced by a Keynesian macroeconomic theory which shows the relationship between the economic goods market and loanable funds market or money market. In other words, it shows how the market for real goods interacts with the financial markets to strike a balance between the interest rate and total output in the macroeconomy. This particular model is designed in the form of a graphical representation of the Keynesian economic theory principle. The output and money are the two important factors in an economy.
In the hypothetical country of Middlelandia, banks are required to hold 20% of checkable deposits as reserves, and the public holds none of the loans as currency in circulation and redeposits all of the loans.
- Complete the table (calculations should be to no more than two decimal places).
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Deposits |
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New Loans |
None of loan proceeds are held as currency in circulation by people |
Loan proceeds redeposited |
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1 |
$500 |
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9 |
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10 |
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Totals |
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- Calculate the new money supply.
- Calculate the money multiplier.
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