Md = a1 + a2 Y + a3 R + a4 P + u (1) Ms = B1 + B2 Y + e     (2) Md= Ms = M*      (3) In this system of equations, Md represents money demand, Ms money supply, Y national income, R interest rate, and P price level. u and e are the random errors. (3) shows the equilibrium condition in money market. a) Show the endogenous and exogenous variables in this system and indicate if regressions (1) and/or (2) are identified.  b) Given the system of equations, show how you estimate regression (2) using 2SLS method. Explain.

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Required Reserve and Excess Reserve Analysis

A required reserve is an amount of cash that banks must keep with themselves, which is certain percentage of the deposits made by their customers. Required reserve is a percentage of the bank's deposits that the respective bank must have on each overnight. The percentage rate is set and determined by the nation’s central bank. It is important to have such funds accumulated to meet its uncertain obligations, sudden liabilities and withdrawals. Required reserve is also known as reserve ratio. Reserve ratio is an important tool to control the money supply.