(i) Consider the following information. Using an equation (or equations) and/or a

diagram of your choice (one that was covered in class), explain:

The proportion of money people want to hold as currency (c) is 70%.

The ratio of reserves to deposits () is 0.4 (i.e. 40%).

The monetary base (H) is 4000 billion.

Nominal income is 10500 billion.

The demand for money is given by: # = (0.5 0.6).

Recall that # = # + #, that # = # and that # = (1 )#.

a) What is the demand for central bank money?

b) What is the equilibrium interest rate?

c) What is the overall supply of money?

(i) Label each of the following statements as true, false or uncertain and explain

briefly:

BEE2039R Turn over

5

a) An increase in the marginal propensity to save leads to a decrease in

output.

b) Fiscal policy has a lower effect on output in an economy with fixed

exchange rates than in an economy with flexible exchange rates.

c) The real money supply is constant along the LM curve.

d) When the ratio