Handout 11

# Handout 11 - 1 and the monetary base is 60 The real...

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Econ 3140-2 Fall 2009 Handout #11 1. ( Question Two from Abel et.al., Chapter 14, numerical problems) (a) The money supply is \$6 ; 000 ; 000 , currency held by the public is \$2 ; 000 ; 000 , and the reserve-deposit ratio is 0 : 25 . Find the deposits, bank reserves, the monetary base, and the money multiplier. (b) In a di/erent economy, vault cash is \$1 ; 000 ; 000 , deposits by depository institu- tions at the Central Bank are \$4 ; 000 ; 000 , the monetary base is \$10 ; 000 ; 000 , and bank deposits are \$20 ; 000 ; 000 . Find bank reserves, the money supply, and the money multiplier. 2. (Question Three from Abel et.al., Chapter 14, numerical problems) When the real interest rate increases, banks have and incentive to lend a greater portion of their deposits, which reduces the reserve-deposit ratio. In particular, suppose that res = 0 : 4 2 r where res is the reserve-deposit ratio and r is the real interest rate. The currency- deposit ratio is 0 : 4
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Unformatted text preview: 1 : , and the monetary base is 60 . The real quantity of money demanded is L ( Y; i ) = 0 : 5 Y & 10 i where Y is real output and i is the nominal interest rate. Assume that expected in±ation is zero so that the nominal interest rate and the real interest rate are equal. (a) If r = i = 0 : 10 , what are the reserve-deposit ratio, the money multiplier, and the money supply? For what real output, Y , does a real interest rate of : 10 clear the asset market? (b) Repeat Part a: for r = i = 0 : 05 . (c) Suppose that the reserve-deposit ratio is &xed at the value you found in Part a: and isn²t a/ected by interest rates. If r = i = 0 : 05 , for what output, Y , does the asset market clear in this case? (d) Is the LM curve ±atter or steeper when the reserve-deposit ratio is &xed? Explain. 1...
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