Question

PROMPT:

For all questions assume the following starting point: The money supply (M) is composed of currency (C) held by the non-bank private sector (NBPS) and demand deposits (DD) held at banks. Banks are required to hold cash reserves (CR) equal to 10% of their demand deposit liabilities. The remainder of the banks DD liabilities are backed by loans (L). Initially banks have 2000 in cash reserves and the NBPS holds 500 in currency. Currently, banks no not hold excess reserves.

OTHER INFORMATION:

a) What are the initial values for DD, L and M?

b) What happens to the values in part a, if the NBPS decides to hold an additional 200 in currency?

c) What would happen to the values in part a if banks decided to hold 2.5% excess reserves?

d) What happens to the values in part a if concerns about the economy's future caused both b and c to happen?

MY QUESTION (ONLY ANSWER THIS):

e) If nominal GDP is 5.5 times the money supply, what happens to nominal GDP in parts a-d

Answer 1

A) DD=2000/0.1=20,000

Loans=2000/0.1-2000=18,000

M= Currency+ DD=500+20,000=20,500

B) so DD at firat stage will reduced by 200.

So reserve=1800

DD=1800/0.1=18,000

Loans=18,000-1800=16,200

M=C+ DD=700+18,00/=18,700

C)New reserve ratio=12.5%

Reserve=2000

DD=2000/0.125=16,000

Loans=16,000-2000=14,000

M=C+DD=500+16,000=16,500

D) reserve=1800 , reserve ratio=12.5%

DD=1800/0.125=14,400

Loans=14,400-1800=12,600

M=700+14,400=15,100

E) a) nominal gdp=20,500*5.5=112,750

b) nominal gdp=18,700*5.5=102,850

C) nominal gdp=16,500*5.5=90,750

D) nominal gdp=15,100*5.5=83,050