Question

If the money supply is given as

M_{s} = S(r,R)

where Mr = real interest rate and R = central bank created reserves...

What is the meaning/interpretation and expected sign of ∂MS/∂r and ∂MS/∂R?

Answer #1

**∂MS/∂r** : This
is the first order derivative . It shows change in money supply due
to unit change of real interest rate . So when real interest rate
increases people will borrow less money and save more . So money
supply declines in the economy . Hence , the expected sign is
negative . They are inversely related .

**∂MS/∂R** : A
central bank creates reserves for the usage of commercial bank . So
when such reserves increase there is more money in the hands of
central bank to lend to commercial banks . So money supply
increases . The expected sign is positive . There is direct
relationship between money supply and R .

Suppose that the real money demand function is
L(Y, r+πe)=0.01Yr+πe ,L(Y, r+πe)=0.01Yr+πe ,
where YY is real output, rr is the real interest rate, and πeπe
is the expected rate of inflation. Real output is constant over
time at Y=150Y=150. The real interest rate is fixed in the goods
market at r=0.05r=0.05 per year.
Suppose that the nominal money supply is growing at the rate of
10% per year and that this growth rate is expected to persist
forever. Currently,...

Suppose the demand for real money balances is Md/P = L(Y, i),
where L(Y, i) is an increasing function of income Y and a
decreasing function of the nominal inter- est rate i. Assume that
the interest elasticity of money demand is infinite when the
nominal interest rate is zero. Money-market equilibrium is
represented by the equation Ms/P = L(Y, i), where Ms is the money
supply controlled by the central bank and P is the price level. The
LM...

The income elasticity of money demand is 0.5 and the interest
rate elasticity of money demand is -0.2. Real income is expected to
grow by 4% over the next year and the real interest rate is
expected to remain constant over the next year. The rate of
inflation has been zero for several years. If the central bank
wants zero inflation over the next year, it should choose _______%
for the growth rate of the nominal money supply.

The real money demand curve is given by: L d (R, Y ) = 0.5Y −
100R − 20 where Y is the real GDP and R refers to the interest
rate. The initial monetary base level MB = 100. The initial money
supply level Ms = 200, price level P = 10 and initial output level
Y = 100. 1. Calculate the initial money multiplier and equilibrium
interest rate. The Fed increases the monetary base by 10% through
open...

If the Central Bank sets the money supply independent of the
interest rate, then the money supply curve is
Select one:
A. horizontal.
B. upward sloping
C. downward sloping.
D. vertical.

Assume the real money demand function is
L(Y;i)=2000+0.3Y-5000i
where Y is real output, P is the price level, i is the nominal
interest rate on non-monetary assets and monetary assets earn no
interest.
a) Assuming that the asset market is in equilibrium at i=0.05.
Find equilibrium levels of real money supply, nominal money supply,
and the velocity of money if P=100, and
Y=2000.
b) Find the real income elasticity of money demand at the
equilibrium level of money balances found...

The main advantage of using the interest rate, rather than the
money supply, as the policy instrument in the dynamic
AD–AS model is that it is more realistic. Today, most
central banks, including the Federal Reserve, set a short-term
target for the nominal interest rate. Keep in mind, though, that
hitting that target requires adjustments in the money supply. For
this model, we do not need to specify the equilibrium condition for
the money market, but we should remember that...

The main advantage of using the interest rate, rather than the
money supply, as the policy instrument in the dynamic
AD–AS model is that it is more realistic. Today, most
central banks, including the Federal Reserve, set a short-term
target for the nominal interest rate. Keep in mind, though, that
hitting that target requires adjustments in the money supply. For
this model, we do not need to specify the equilibrium condition for
the money market, but we should remember that...

Assume that the demand for real money balance, (M/P) d = 0.5Y –
200i, where Y is national income and i is the nominal interest rate
(in percent). The real interest rate r is fixed at 2 percent by the
investment and saving functions. The expected inflation rate is 1
percent, real GDP is 5,000 and the money supply is 209,110.
a. What is the nominal interest rate?
b. What is the price level?
c. Now suppose Y is 2,000,...

Refer to the table for Moola given below to answer the following
questions.
Money Supply
Money Demand
Interest Rate
Investment at Interest (Rate
Shown)
Potential Real GDP
Actual Real GDP at Interest (Rate
Shown)
$500
$800
3%
$70
$350
$390
500
700
4%
$60
350
370
500
600
5%
$50
350
350
500
500
6%
$40
350
330
500
400
7%
$30
350
310
Instructions: Enter your answers as whole
numbers.
a. What is the equilibrium interest rate in Moola?...

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