Practice Questions_Macro II_2011

# Practice Questions_Macro II_2011 - Lahore School of...

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Lahore School of Economics Macroeconomics II – Spring 2011 BSc II – Section B and C  Solutions to Practice Questions Mankiw, Chapter 18 (Money Supply and Money Demand) The model of the money supply developed in Chapter 18 shows that The money supply  depends on the money multiplier  and the monetary base  B . The money multiplier can  also be expressed in terms of the reserve–deposit ratio   rr   and the currency–deposit ratio   cr . Rewriting the  money supply equation: . This equation shows that the money supply depends on the currency–deposit ratio, the reserve–deposit ratio,  and the monetary base. To answer parts (a) through (c), we use the values for the money supply, the monetary  base, the money multiplier, the reserve–deposit ratio, and the currency–deposit ratio from Table 18–1: a. To determine what would happen to the money supply if the currency–deposit ratio had risen but the  reserve–deposit ratio had remained the same, we need to recalculate the money multiplier and then plug this  value into the money supply equation  mB . To recalculate the money multiplier, use the 1933 value of the  currency–deposit ratio and the 1929 value of the reserve–deposit ratio: = ( cr 1933  + 1)/( cr 1933  +  rr 1929 ) = (0.41 + 1)/(0.41 + 0.14) = 2.56.

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To determine the money supply under these conditions in 1933: M 1933  =  mB 1933 . Plugging in the value for
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## This note was uploaded on 02/13/2012 for the course ECON 101 taught by Professor Malrani during the Spring '05 term at Bunker Hill.

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Practice Questions_Macro II_2011 - Lahore School of...

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