Consider an economy with a constant population in which people wish to hold bank checking deposits worth a total of 5,000 goods in every period. The economy has a total endowment of 10,000 goods in each period. There is a total stock of unintermediated capital of 1,000 goods in each period. Bank deposits are the only form of money in the economy. Deposits at banks are subject to a reserve requirement of 20 percent. The real rate of return on capital is = 1.10 per period. After meeting the reserve requirement, banks invest the remainder of all deposits into capital. Individuals do not hold capital. The fiat money stock (monetary base) is $2,000 in every period. Calculate the following variables:

1. The price of a good (in dollars).

2. The gross real rate of return on deposits that will be offered by banks in a competitive

economy.

3. The total nominal money stock 1

4. The Money Multiplier

5. The total capital stock.

6. Real GDP.

From now on, assume that the central bank allows banks to borrow up to one-half of required

reserves at the gross interest rate of 1.08. Calculate the following variables:

7. The price of a good (in dollars).

8. The gross real rate of return on deposits that will be offered by banks in a competitive

economy.

9. The total nominal money stock 1

10. The Money Multiplier

11. The total capital stock.

12. Real GDP.

Now consider the case in which the Central Bank is willing to loan any quantity of reserves

to bank.

13. What amount would a a bank choose to borrow if the Central Bank interest rate is

less than ?

14. Would your last answer change if capital exhibits diminishing marginal returns?