When the real interest rate increases, banks have an incentive to lend a greater portion of their deposits, which reduces the reserve-deposit ratio. In particular, suppose that: res = 0.6-2.5r where res is the reserve-deposit ratio and r is the real interest rate. The currency-deposit ratio is 0.50, the price level is fixed at 2.0, and the monetary base is 70. The real quantity of money demanded is: L(Y, ) = 0.5Y - 9i where Y is real output and i is the nominal interest rate. Assume that the expected inflation rate is zero so that the nominal interest rate and the real interest rate are equal. a. If r=i = 0.10, what are the reserve-deposit ratio, money multiplier, and money supply? For what real output, Y, does a real interest rate of 0.10 clear the asset market? reserve-deposit ratio= money multiplier = 0.35 (round to two decimal places) (round to two decimal places) money supply = (round to the nearest whole number) Y = (round to the nearest whole number) b. Now assume that r=i = 0.05. What are the reserve-deposit ratio, money multiplier, and money supply? For what real output, Y, does a real interest rate of 0.05 clear the asset market? (round to two decimal places) reserve-deposit ratio = money multiplier = (round to two decimal places) money supply = (round to the nearest whole number) Y = (round to the nearest whole number) c. Suppose that the reserve-deposit ratio is fixed at the value you found when r=i = 0.10 and isn't affected by interest rates. If r=i = 0.05, for what output, Y, does the asset market clear in this case? Y = (round to the nearest whole number) When the real interest rate increases, banks have an incentive to lend a greater portion of their deposits, which reduces the reserve-deposit ratio. In particular, suppose that: res = 0.6-2.5r where res is the reserve-deposit ratio and r is the real interest rate. The currency-deposit ratio is 0.50, the price level is fixed at 2.0, and the monetary base is 70. The real quantity of money demanded is: L(Y, ) = 0.5Y - 9i where Y is real output and i is the nominal interest rate. Assume that the expected inflation rate is zero so that the nominal interest rate and the real interest rate are equal. a. If r=i = 0.10, what are the reserve-deposit ratio, money multiplier, and money supply? For what real output, Y, does a real interest rate of 0.10 clear the asset market? reserve-deposit ratio= money multiplier = 0.35 (round to two decimal places) (round to two decimal places) money supply = (round to the nearest whole number) Y = (round to the nearest whole number) b. Now assume that r=i = 0.05. What are the reserve-deposit ratio, money multiplier, and money supply? For what real output, Y, does a real interest rate of 0.05 clear the asset market? (round to two decimal places) reserve-deposit ratio = money multiplier = (round to two decimal places) money supply = (round to the nearest whole number) Y = (round to the nearest whole number) c. Suppose that the reserve-deposit ratio is fixed at the value you found when r=i = 0.10 and isn't affected by interest rates. If r=i = 0.05, for what output, Y, does the asset market clear in this case? Y = (round to the nearest whole number)
