9.4 Suppose the central bank sets the reserve requirement ratio at 5 percent. The maximum the central bank is willing to lend is 25 percent of require reserves, charging the gross real return of 1 on discount window loans. We assume the gross real return on fiat money is 1.02 and the gross real return on capital is 1.08.
A. What is the gross real return on deposits?
B. If the supply of fiat money is $10,000, what is the quantity of M1 in this economy?
1.Gross real returns on deposit is :1.02
●When a Investor deposits money into a bank account, the interest on the deposit is equal to the gross return.
●In the given case,Fiat Money which is usually deposited in the form of Demand Deposits in banks.
2.Quantity of M1 in the Economy
Reserve requirement ratio is 5%
Lending ratio is 25% of require reserves
=10000 + 25%(10000×5%)
=10000 + 125
To be part of M1 ,It must includes with public which is people and banks
Here 25% is with public(people and banks) and hence firm part of m1
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