Question 1

a. In an economy, firms tend to hold 25% of output as inventory.

i. If in period 1, total output is 200 units, calculate the stock of inventory in that period.

ii. If production increases by 50% in the following period, calculate inventory investment over the two periods.

b. The economy is also characterized by the following features;

Total deposits = $250,000,

Total currency in circulation = $45,000; and

Total reserves = $25,000.

Given the information above, calculate the money multiplier and hence the change in the money supply if total reserves increase by 10%.