In the B-M approach, explain the effects of the following and show them

diagrammatically:

a) an introduction of a mandatory reserve ratio in excess of the prudential ratio currently

in force;

b) the development of new deposit liabilities with zero reserve requirements;

a dramatic increase in the number and distribution of cash machines.

b. Using figure 1, show the difference in impact on money market equilibrium of a given

reduction in reserve assets when

(a) the money supply curve shows some positive elasticity with respect to the bond rate

and

(b) When the money supply curve is completely inelastic with respect to the bond rate.

Figure 1.

c. How is the LM curve affected by the introduction of some interest elasticity in the money

supply curve?

d. In the flow of funds analysis, explain the effect of an increase in the government's budget

deficit, ceteris paribus

e. Why, according to the flow of funds approach, does the choice of exchange rate regime

make monetary control more, or less, difficult for the authorities