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Unformatted text preview: Monetary Economics I: Financial Markets and Institutions Final Exam December 23, 2009 Professor Ahmet Akyol Start: 9:00am. Finish: 11:00am. Questions 1. 30 points Consider an overlapping generations economy with fiat money and capital. Assume that there is a competitive banking sector. Individuals hold only deposits at these banks, which pay a risk-free rate of return r * . Deposits at these banks are subject to a reserve requirement. In particular, goods of each unit of goods deposited must be held in currency. The bank makes loans to businesses which pays x 1 units of goods with probability 1 and x 2 units of goods with probability 2 next period per good invested. Assume that each bank can make loans to a significantly large number of businesses such that it can offer a risk-free return on deposits. The gross population growth rate is n . The gross growth rate of fiat money supply is given by z . Assume that z > 1. Assume that the return on deposits exceeds the return on fiat money. (a) Determine the risk-free rate of return on deposits, r * , assuming zero profits for banks....
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