Question 3

Part (a)

Suppose that your bank's reserve ratio is 0.2 and you deposit $50,000 into the bank.Assume that the bank loans out the maximum amount it can, and people deposit all their money.What is the deposit multiplier? What is the total increase in deposits in the banking system? What is the change in the money supply?

Part (b)

Graph the demand for and supply of Australian dollars for euros. Suppose the Reserve Bank of Australia decides to follow an appropriate monetary policy to contain inflation. Show graphically and explain the effect of this policy on the demand and supply of dollars and the resulting change in the exchange rate of euros for dollars.