In: Economics
In August of 2015, the Chinese central bank decided to reduce that nation's required reserve-deposit ratio from 18.5 percent to 18 percent. Assuming no change in the amount of cash held by the Chinese public, that commercial banks lend all their excess reserves, and that bank reserves was a constant 4,329 billion yuan both before and after the change.
a. The value of Chinese banks deposits was billion yuan before this change in the reserve-deposit ratio and billion yuan after the change.
b. Therefore the total change in deposits as a consequence of the change in the reserve-deposit ratio was billion yuan.
c.
An economy is described by the following equations:
C | = 2,600 + 0.8 (Y – T) – 10,000r |
IP | = 2,000 – 10,000r |
G | = 1,800 |
NX | = 0 |
T | = 3,000 |
The real interest rate, expressed as a decimal, is 0.10 (that is,
10 percent).
a. Find a numerical equation relating planned aggregate expenditure
to output.
Instructions: Enter your response for mpc
rounded to one decimal place.
PAE = ? + ? Y. ???
b. Using a table (or algebra), solve for short-run equilibrium
output.
Instructions: If you are entering any negative
numbers be sure to include a negative sign (-) in front of those
numbers. Leave no cells blank. You must enter 'zero' for the answer
to grade correctly.
Output Y | Planned aggregate expenditure (PAE) | Y – PAE |
9,500 | ||
9,600 | ||
9,700 | ||
9,800 | ||
9,900 | ||
10,000 | ||
10,100 | ||
10,200 |
Short-run equilibrium output: .
c. Show your result graphically using the Keynesian cross
diagram.
draw graph
Instructions: On the graph below, use the line
tool 'Exp.' to draw the expenditure line for levels of income
between 9,500 and 10,500. Draw only the endpoints. Then use the
point tool 'A' to locate the equilibrium level of income.
Answer )
(a)
We first find the value of total deposits at 2 reserve ratio:
When reserve ratio = 18.5%
Total deposits = (100/18.5) × (4329) = $23,400
When reserve ratio = 18%
Total deposits = (100/18) × 4329 = $24,050
(b)
Total change in deposits = 24050 - 23400 = $650
Ans 2.)
Planned aggregate expenditure equation can be written as:
PAE = C + I + G + NX
= 2,600 + 0.8 (Y – 3000) – 10,000r + 2,000 – 10,000r + 1800
As, it is given that , r = 0.1
PAE = 2600 + 1800 - 2400 + 2000 - 20,000(0.1) + 0.8Y
PAE = 2000 + 0.8Y => Equation
Now we find the value of 'Y' by solving the PAE equation:
Y = 2000 + 0.8Y
Y - 0.8Y = 2000
0.2Y = 2000
Y = 2000/0.2
Y =$10,000
Output (Y) | Planned aggregate expenditure (PAE) | Y - PAE |
9500 | 9600 | -100 |
9600 | 9680 | -80 |
9700 | 9760 | -60 |
9800 | 9840 | -40 |
9900 | 9920 | -20 |
10000 | 10,000 | 0 |
10100 | 10080 | 20 |
10200 | 10160 | 40 |
We can see in the above table that the real GDP is equal to the planned aggregatw expenditure at level of output = $10,000
Planned expenditure 10,000 45line PAE 10,000 Real GDP