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If 10% of the overall money demand (Md) is in the form of currency (c1=10%) and...

  1. If 10% of the overall money demand (Md) is in the form of currency (c1=10%) and the required reserve ratio (θ) is 20%. The money demand function is Md = $Y(0.8-4i)

Given a monetary base (H) of $200 billion and a nominal income ($Y) of $6000 billion,

  1. What is the demand for central bank money and the size of the Money Multiplier. 5%
  2. Suppose the demand for central bank money equals to its supply, what is the level of interest rate? Measure the overall supply of money, does it equal to the overall demand for money? 5%
  3. Given the same monetary base, what will happen to the equilibrium interest rate, multiplier and total money supply if the central bank increases the required reserve ratio to 25%? 10%
  4. If the central bank has an interest rate target which is 1 percentage point (1%) higher than B.), what should be the new level of monetary base? 5%

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Rahul Sunny answered 2 years ago
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