a.
To describe:
The reserve deposit ratio, the money multiplier and the money supply, and the real output Y at which a real interest rate of
a.
Answer to Problem 3NP
The reserve deposit ratio is
Explanation of Solution
Given data,
Currency deposit ratio is
Price level fixed at
Monetary base is
Real quantity of money demanded is
If
Expected inflation is zero
Nominal interest rate and real interest rate is equal.
Substitute the values from given data in the formula, we get:
And,
Formula used to calculate money multiplier is given below:
Substitute the value of c = 0.4 and res = 0.2, in the formula, we get:
MoneyMultiplier
Now, the calculation of money supply is as follows:
Money Supply
And, calculation of real output will be done as follows:
Here,
Ms = 140
Now, substitute the above value to the equation,
Thus, the money supplier will be
Introduction: The IS-LM model is an extended Keynesian model, in this graphic representation of IS-LM curve that helps in maintaining balance in the economy by establishing equilibrium between money supply and interest rates. This model is very useful
b.
To describe:
When.
b.
Answer to Problem 3NP
The reserve deposit ratio is
Explanation of Solution
The formula to calculate reserve deposit ratio is as under:
Given data,
Substitute value r = 0.5, we get
And, Money multiplier is calculated using the following formula:
Substitute the value of c = 0.4 and res = 0.3, as calculated above.
Now, substitute the value of money multiplier i.e. 2, in the formula of money supply:
And,
The formula to Calculate the real output would be done as under:
given,
Ms = 120
i = 0.05
Thus, the money supplier will be
Introduction: The IS-LM model is an extended Keynesian model, in this graphic representation of IS-LM curve that helps in maintaining balance in the economy by establishing equilibrium between money supply and interest rates. This model is very useful macroeconomic tool for analysis of the money market and analysis of the goods market, which together helps in determining the equilibrium levels of interest rates and output in the economy in a given prices. It presents the set of all possible combinations of the GDP and interest rates, where the money supply and demand matches. Where, IS stands for Investment Savings and LM stands for Liquidity Money.
c.
To describe:
If
c.
Answer to Problem 3NP
The asset market is clear in the case at output Y of
Explanation of Solution
In this case, the multiplier is unchanged from part a, which is at
Given data,
M=140
i = 0.05
Substitute the above values in the equation:
Introduction: The IS-LM model is an extended Keynesian model, in this graphic representation of IS-LM curve that helps in maintaining balance in the economy by establishing equilibrium between money supply and interest rates. This model is very useful macroeconomic tool for analysis of the money market and analysis of the goods market, which together helps in determining the equilibrium levels of interest rates and output in the economy in a given prices. It presents the set of all possible combinations of the GDP and interest rates, where the money supply and demand matches. Where, IS stands for Investment Savings and LM stands for Liquidity Money.
d.
To examine:
Whether the impact on LM curve is flatter or steeper when the reserve deposit ratio depends on the real interest rate than when it is fixed.
d.
Answer to Problem 3NP
If the reserve deposit ratio is unaffected by the real interest rate, the LM curve is steeper than when it is affected by the real interest rate.
Explanation of Solution
Supposing there is a reduction in the interest rates, it will lead to lowering of the reserves for the banks. This means, a high reserve ratio will lead to lowering of money multiplier and thereby reducing the nominal money supply. Therefore, the LM curve will be steeper when it is unaffected by the real interest rate more than that of when affected by the real interest rate.
Introduction: The IS-LM model is an extended Keynesian model, in this graphic representation of IS-LM curve that helps in maintaining balance in the economy by establishing equilibrium between money supply and interest rates. This model is very useful macroeconomic tool for analysis of the money market and analysis of the goods market, which together helps in determining the equilibrium levels of interest rates and output in the economy in a given prices. It presents the set of all possible combinations of the GDP and interest rates, where the money supply and demand matches. Where, IS stands for Investment Savings and LM stands for Liquidity Money.
Want to see more full solutions like this?
- Suppose that the demand for money is given by the following equation: MD = $Y (0.25 – 0.8i) Assume that nominal income ($Y) is $5,000 billion. Determine the equilibrium level of the interest rate if the money supply is $900 billion. Suppose the central bank increases the money supply to $950 billion. Determine the new equilibrium interest rate. Suppose we have the original money supply (in part a) and that the level of nominal income increases to $6,250 billion. Determine the equilibrium interest rate.arrow_forward♫ The following graph represents the money market in a hypothetical economy. As in the United States, this economy has a central bank called the Fed, but unlike in the United States, the economy is closed (that is, the economy does not interact with other economies in the world). The money market is currently in equilibrium at an interest rate of 5% and a quantity of money equal to $0.4 trillion, as indicated by the grey star. INTEREST RATE (Percent) 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 0 Money Demand 0.1 Money Supply 0.2 0.3 04 0.5 MONEY (Trillions of dollars) 0.6 0.7 0.8 14 New MS Curve + New Equilibrium Suppose the Fed announces that it is lowering its target interest rate by 25 basis points, or 0.25 percentage point. To do this, the Fed will use open- market operations to money by the public. thearrow_forwardProblem 2. Suppose that money demand is given by Md = $Y(0.45 – 0.4i) where $Y is $90. Answer the Following Questions: a) What is the demand for money when interest rates are zero? b) What is the smallest value of the money supply at which the interest rate is zero? c) Once the interest rate is zero, can the central bank continue to increase the money supply?arrow_forward
- C = 50 + 0.9 · (Y – T) I = 50 – 1000 -r where Y is real output and r is the real interest rate. Government purchases and taxes are Ğ = 500, Ť= 500. The money market equilibrium curve-or LM curve-is M Y P 5i where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying M = 10000 units of money, and expected inflation is aº = 0.05. The long-run aggregate supply (LRAS) is Y, = 1000. Suddenly, there is a climate shock that changes the marginal propensity to consume (MPC), and the consumption function changes to C' = 50 +0.8 · (Y – T). What are the effects of the shock on the short-run equilibrium values of output Y, consumption C, investment I, real interest rate r and price P? Do NOT give any numerical answers, just fill in the following table with +, – or 0 to indicate whether each variable increases (+), decreases (–), or doesn't change (0). There are 6 blanks to fill. You do not need to create a table when you type your answers, but please…arrow_forwardSuppose that the supply of credit cards is given by (1/201) X = q, the nominal interest rate is 0.09, real GDP is Y = 53, and the price level is P = 101. What must be the quantity of money supplied for this money market to be in equilibrium. Round your answer to the nearest whole number.arrow_forwardSuppose that this year's money supply is $1,200 billion, nominal GDP is $6,000 billion and real GDP is $5,000 billion. (This question concerns the Equation of Exchange in the Classical Quantity Theory of Money). a) What is the price level (expressed as a percentage-i.e., as a price index)? b) What is the velocity of money? c) Suppose that velocity is constant and the economy's output of goods and services rises by 6 percent each year. If the Fed keeps the money supply constant, what will nominal GDP be next year? d) Under the conditions in c) what will happen to the price level next year? e) What money supply should the Fed set next year if it wants to keep the price level stable? 1) What money supply should the Fed set next year if it wants the inflation rate to be 8 percent?arrow_forward
- Assume that the money demand function is (M / P)d = 2,200 – 200r, where r is the interest rate in percent. If the price level is fixed at P=2, and the Fed wants to fix the interest rate at 7 percent, it should set the money supply at: a. 2,000. b. 1,800. c. 1,600. d. 1,400.arrow_forwardHow to answer a and b Suppose the monetary base is an economy is equal to 100 and nominal GDP is equal to 10,000. The money demand function is given as Md=$Y(0.4-2i). Interest rates are measured as a fraction. Suppose that initially people don't hold any currency and that the bank hold 10% of deposits as reserves. a) calculate the equilibrium demand for central bank money. b) solve for the equilibrium interest rate in the market for central bank money.arrow_forwardThe income elasticity of money demand is ny = 0.7 and the interest rate elasticity of money demand is n₁ = -0.06. Suppose that the central bank increases the money supply by 2.6%, real income increases by 2% and inflation is 3%. What is the percentage increase in the nominal interest rate? -0.3 (or -30%) 0.3 (or 30%) -0.1 (or -10%) 0.1 (or 10%)arrow_forward
- Exercise 1 cr+1 Consider the money supply Ms=mxB , m = cr+rr Assume that the demand for real money is given by the equation (M/P)d=0.25Y, and that the output has been growing 3% per year. Assume, further, that you have been called before Congress to testify about the long-run effects of increasing the growth of the money supply to 10 % per year. 1. State, compute and explain the long-run effects of this change on the inflation rate, on the nominal interest rate, on the real interest rate, on investment and on the real GDP. For each of them, argue both using the formulae that we studied and the macroeconomic dynamic beyond the effect. 2. Compute the implied money velocity. Suppose that the actual nominal value of the output (PY) is 1000, the value of the reserves is 50 and the toal value of the deposits is 75. Find the actual money multiplier. 3. State the different ways in which the central bank can achieve the change (+10%) in the money supply (think about the variables that can…arrow_forwardIf Money Supply increases, the equilibrium interest rate will: a) be ambiguous b) increase c) decrease d) not changearrow_forwardSuppose that money demand is given by M^d=$Y(0.23–0.5i) where $Y is $110. If the Federal Reserve sets an interest rate target of 6%, the money supply it must create is $_. (Round your response to two decimal places.)arrow_forward
- Economics (MindTap Course List)EconomicsISBN:9781337617383Author:Roger A. ArnoldPublisher:Cengage LearningMacroeconomics: Private and Public Choice (MindTa...EconomicsISBN:9781305506756Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. MacphersonPublisher:Cengage Learning