monetary policy

monetary policy - Monetary Policy algebraic example Suppose...

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

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monetary policy - Monetary Policy algebraic example Suppose...

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