ECON 4721, Money & Banking

Reference: Modeling Monetary Economics (2016, Fourth Edition, Cambridge University Press) by Bruce Champ, Scott Freeman and Joseph Haslag.

Consider an overlapping generations model where people live for three periods --- young, middle aged and old. Population grows according to

Nt=1.1Nt1. Suppose consumers are endowed with yunits of the consumption good when young and zero when middle aged or old.There are three assets in the economy --- fiat money, capital and deposits. The banking sector is competitive. The supply of fiat money is constantM. One unit of capital produces1.44units of output intwoperiods. Banks are required to hold 20%of their deposits as reserves (in fiat money), but they can borrow up to40%of their reserve requirements from the central bank at a gross interest rate of1.15. What is the gross interest banks pay on deposits?