Calculating money multiplier and nominal values of deposits

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Reference no: EM1311607

Consider the following Keynesian closed economy model

Real money demand : L= 0.2 Y=200r

Full employment output: Y*=500

Nominal monetary base : H= 960

Currency deposit ratio: cu=0.5

Suppose that the aggregate demand for goods is decreasing function of the interest rate

Y=.6/(.001) - r /(.001)

A. Suppose that the reserve- deposit ratio I sres=0.1 and that the economy is in long run equilibrium.

1.What is the value of the money multiplier?

2. What is the value of the nomial money supply?

3. What are the nominal values of deposits, currency and reserves?

4.What is the value of the real interest rate in long run equilibrium?

Hint: you know full employment output What interest rate equaltes the aggregate demand fro goods to the aggregate supply for goods

5. what is the value of the price level inlong run equilibrium ?

Hint: you know full employment output and the supply . What does the price level have to be so that the money market is equilibrium?

6. What is the value of velocity in long run equilibrium?

B. Suppose that , as a result of a financial crisis , banks become reluctant to make loans and they want to increase their reserve holding relative to deposit. Specifically , the reserve deposit ratio increases to res=0.7

1. Suppose that the central bank maintains the value of monetary base equal to 960.

a. what is the new value of the money multiplier?

b. What is the new value of the nominal money supply?

c. Given the new value of the nominal money supply , what are the short run equilibrium values of output and the real interest rate when the price level remains fixed at its value

d. What is the new long -run equilibrium value of the price level

1.Suppose that when the reserve - deposit ratio increase to ares0.7 , the central bank immediately changes the monetyary base to maintain output and the price level at their long run equilibrium values .What value of the monetary base will maintain the level of output and the price level unchanged?

Reference no: EM1311607

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