Assume households and firms hold share of e=1/5 of their deposits as cash/currency and the desired...

 

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Assume households and firms hold share of e=1/5 of their deposits as cash/currency and the desired reserve ratio for commercial banks is = 0.1. The money demand for this economy is given by MY(0.25-i), where i is the nominal interest rate. output Y is fixed at its potential at Y = 100. The monetary base is B = 20. a) Derive the money multiplier for this economy. Derive the economy's demand for mon- etary base money as a function of the interest rate i. b) What must be the equilibrium interest rate i' in this economy? e) How much reserves do banks hold, how much currency does the public hold? Assume households and firms hold share of e=1/5 of their deposits as cash/currency and the desired reserve ratio for commercial banks is = 0.1. The money demand for this economy is given by MY(0.25-i), where i is the nominal interest rate. output Y is fixed at its potential at Y = 100. The monetary base is B = 20. a) Derive the money multiplier for this economy. Derive the economy's demand for mon- etary base money as a function of the interest rate i. b) What must be the equilibrium interest rate i' in this economy? e) How much reserves do banks hold, how much currency does the public hold?

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a The money multiplier is determined by the desired reserve ratio and the currency holding ratio In ... View the full answer