monetary policy

# monetary policy - Monetary Policy algebraic example Suppose...

This preview shows pages 1–2. Sign up to view the full content.

Monetary Policy algebraic example Suppose we are given the following information: - RGDP gap: - \$100 - Initial Deposits: \$50 - Initial Reserve Ratio: 25% - Money Demand = 1000 100i - Demand for Loanable Funds = 200 10i - MPC: 0.8 Suppose the Fed wants to do open market operations: Suppose the Fed wants to buy government bonds valued at \$50. Let’s follow the steps from class: First find initial conditions: 1. Find the initial interest rate: a. Initial maximum money supply = Initial Deposits * = \$50 * = \$50 * 4 = \$200 b. Interest rate in money market: Money Supply = Money Demand \$200 = 1000 100i i = 8% 2. Find the old level of loans in the loanable funds market Demand for loanable funds = 200 10i = 200 10*8 = 120 Then see what monetary policy does: 3. Find the new level of money supply (remember, the Fed buys \$50 of bonds!) a. Initial deposits are \$50 + \$50 = \$100 b. Maximum money supply = \$100 * = \$400 4. Find the new interest rate in the money market a. Money supply = money demand

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

## This note was uploaded on 04/06/2010 for the course ECON 1102 taught by Professor Someguy during the Spring '07 term at Minnesota.

### Page1 / 3

monetary policy - Monetary Policy algebraic example Suppose...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online