Question

1.If bank reserves are 200, the public holds 500 in currency, and the desired reserve-deposit ratio is 0.20, the money supply is ?

2. If consumption increases by $8 when disposable income increases by $16, the marginal propensity to consume (mpc) equals:

3. Suppose there is 2% frictional unemployment, 3% structural unemployment, and -2% cyclical unemployment, then the natural rate of unemployment equals:

4. In Macroland there is $6,000,000 in currency. The public holds half of the currency and banks hold the rest as reserves. If banks' desired reserve/deposit ratio is 10 percent, the money supply in Macroland equal ________.

Answer 1

(1) Reserve deposit ratio = 0.20

Bank reserve = 200

Checkable deposit = (Bank reserve / Reserve deposit ratio)

Checkable deposit = (200 / 0.2)

Checkable deposit = 1000.

Cash hold by public = 500

Money supply = Checkable deposit + Cash holds by public.

Money supply = 1000 + 500

Money supply = 1500.

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(2) consumption increases by $8 when disposable income increases by $16,

MPC = (change in consumption / change in disposable income)

MPC = ($8 / $16)

MPC = 0.5

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(3) Natural unemployment rate = Frictional unemployment + Structural unemployment

Natural Unemployment rate = 2% + 3%

Natural unemployment rate = 5%

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(4)  In Macroland there is $6,000,000 in currency. The public holds half of the currency and banks hold the rest as reserves.

So, bank holds $3,000,000 as a reserve.

Requied reserve ratio = 10%

So, bank reserves of $3,000,000 must be 10% of deposit.

So deposit = ($3,000,000 / 0.10) = $30,000,000

Public holds $3,000,000 in currency.

Money supply = Checkable deposit + Cash holds by public.

Money supply = $30,000,000 + $3,000,000

Money supply =$33,000,000