Question

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 1

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