Consider the following Keynesian closed economy model. Real money demand: L = 0.2Y – 200r Full-employment equilibrium output: Y* = 500 Nominal monetary base: MB = 960 Currency-deposit ratio: cu = 0.5 The aggregate demand for goods is a decreasing function of the real interest rate: Y = .6/(.001) – r/(.001) In this question the real interest rate r is written in decimal form. (I.e., if the interest rate is 5% then r=0.05.) (a) Suppose that the reserve-deposit ratio is res = 0.1 and that the economy is in the long-run equilibrium.Consider the following Keynesian closed economy model.

Real money demand: L = 0.2Y – 200r

Full-employment equilibrium output: Y* = 500

Nominal monetary base: MB = 960

Currency-deposit ratio: cu = 0.5

The aggregate demand for goods is a decreasing function of the real interest rate:

Y = .6/(.001) – r/(.001)

In this question the real interest rate r is written in decimal form. (I.e., if the interest rate

is 5% then r=0.05.)

 

(a) Suppose that the reserve-deposit ratio is res = 0.1 and that the economy is in the

long-run equilibrium.

(i) What is the value of the money multiplier?

(ii) What is the value of the nominal money supply?

(iii) What are the nominal values of deposits, currency, and reserves?

(iv) What is the value of the real interest rate in the long-run equilibrium?

Hint: You know full-employment output.

(v) What is the value of the price level in the long-run equilibrium?

Hint: You know full-employment output and the money supply.

(vi) What is the value of velocity of money in the long-run equilibrium?

 

(b) Suppose that, as a result of a financial crisis, banks become reluctant to make loans

and they want to increase their reserve holdings relative to deposits. Specifically, the

reserve-deposit ratio increases dramatically to res = 0.7. For parts (i)-(iv), the central

bank maintains the value of monetary base equal to 960.

(i) What is the new value of the money multiplier?

(ii) What is the new value of the nominal money supply?

(iii) Suppose that the price level remains fixed at the value you found in (a) part (v).

Given the new value of the nominal money supply, what are the short-run

equilibrium values of output and the real interest rate?

(iv) What is the new long-run equilibrium value of the price level?

(v) Now suppose that the central bank wants to maintain short-run equilibrium

output and the price level at their long-run equilibrium values (that you found in

part (a)). What do they have to set the monetary base to in order for this to

occur?Consider the following Keynesian closed economy model.

Real money demand: L = 0.2Y – 200r

Full-employment equilibrium output: Y* = 500

Nominal monetary base: MB = 960

Currency-deposit ratio: cu = 0.5

The aggregate demand for goods is a decreasing function of the real interest rate:

Y = .6/(.001) – r/(.001)

In this question the real interest rate r is written in decimal form. (I.e., if the interest rate

is 5% then r=0.05.)

 

(a) Suppose that the reserve-deposit ratio is res = 0.1 and that the economy is in the

long-run equilibrium.

(i) What is the value of the money multiplier?

(ii) What is the value of the nominal money supply?

(iii) What are the nominal values of deposits, currency, and reserves?

(iv) What is the value of the real interest rate in the long-run equilibrium?

Hint: You know full-employment output.

(v) What is the value of the price level in the long-run equilibrium?

Hint: You know full-employment output and the money supply.

(vi) What is the value of velocity of money in the long-run equilibrium?

 

(b) Suppose that, as a result of a financial crisis, banks become reluctant to make loans

and they want to increase their reserve holdings relative to deposits. Specifically, the

reserve-deposit ratio increases dramatically to res = 0.7. For parts (i)-(iv), the central

bank maintains the value of monetary base equal to 960.

(i) What is the new value of the money multiplier?

(ii) What is the new value of the nominal money supply?

(iii) Suppose that the price level remains fixed at the value you found in (a) part (v).

Given the new value of the nominal money supply, what are the short-run

equilibrium values of output and the real interest rate?

(iv) What is the new long-run equilibrium value of the price level?

(v) Now suppose that the central bank wants to maintain short-run equilibrium

output and the price level at their long-run equilibrium values (that you found in

part (a)). What do they have to set the monetary base to in order for this to

occur?Consider the following Keynesian closed economy model.

Real money demand: L = 0.2Y – 200r

Full-employment equilibrium output: Y* = 500

Nominal monetary base: MB = 960

Currency-deposit ratio: cu = 0.5

The aggregate demand for goods is a decreasing function of the real interest rate:

Y = .6/(.001) – r/(.001)

In this question the real interest rate r is written in decimal form. (I.e., if the interest rate

is 5% then r=0.05.)

 

(a) Suppose that the reserve-deposit ratio is res = 0.1 and that the economy is in the

long-run equilibrium.

(i) What is the value of the money multiplier?

(ii) What is the value of the nominal money supply?

(iii) What are the nominal values of deposits, currency, and reserves?

(iv) What is the value of the real interest rate in the long-run equilibrium?

Hint: You know full-employment output.

(v) What is the value of the price level in the long-run equilibrium?

Hint: You know full-employment output and the money supply.

(vi) What is the value of velocity of money in the long-run equilibrium?

 

(b) Suppose that, as a result of a financial crisis, banks become reluctant to make loans

and they want to increase their reserve holdings relative to deposits. Specifically, the

reserve-deposit ratio increases dramatically to res = 0.7. For parts (i)-(iv), the central

bank maintains the value of monetary base equal to 960.

(i) What is the new value of the money multiplier?

(ii) What is the new value of the nominal money supply?

(iii) Suppose that the price level remains fixed at the value you found in (a) part (v).

Given the new value of the nominal money supply, what are the short-run

equilibrium values of output and the real interest rate?

(iv) What is the new long-run equilibrium value of the price level?

(v) Now suppose that the central bank wants to maintain short-run equilibrium

output and the price level at their long-run equilibrium values (that you found in

part (a)). What do they have to set the monetary base to in order for this to

occur?Consider the following Keynesian closed economy model.

Real money demand: L = 0.2Y – 200r

Full-employment equilibrium output: Y* = 500

Nominal monetary base: MB = 960

Currency-deposit ratio: cu = 0.5

The aggregate demand for goods is a decreasing function of the real interest rate:

Y = .6/(.001) – r/(.001)

In this question the real interest rate r is written in decimal form. (I.e., if the interest rate

is 5% then r=0.05.)

 

(a) Suppose that the reserve-deposit ratio is res = 0.1 and that the economy is in the

long-run equilibrium.

(i) What is the value of the money multiplier?

(ii) What is the value of the nominal money supply?

(iii) What are the nominal values of deposits, currency, and reserves?

(iv) What is the value of the real interest rate in the long-run equilibrium?

Hint: You know full-employment output.

(v) What is the value of the price level in the long-run equilibrium?

Hint: You know full-employment output and the money supply.

(vi) What is the value of velocity of money in the long-run equilibrium?

 

(b) Suppose that, as a result of a financial crisis, banks become reluctant to make loans

and they want to increase their reserve holdings relative to deposits. Specifically, the

reserve-deposit ratio increases dramatically to res = 0.7. For parts (i)-(iv), the central

bank maintains the value of monetary base equal to 960.

(i) What is the new value of the money multiplier?

(ii) What is the new value of the nominal money supply?

(iii) Suppose that the price level remains fixed at the value you found in (a) part (v).

Given the new value of the nominal money supply, what are the short-run

equilibrium values of output and the real interest rate?

(iv) What is the new long-run equilibrium value of the price level?

(v) Now suppose that the central bank wants to maintain short-run equilibrium

output and the price level at their long-run equilibrium values (that you found in

part (a)). What do they have to set the monetary base to in order for this to

occur?Consider the following Keynesian closed economy model.

Real money demand: L = 0.2Y – 200r

Full-employment equilibrium output: Y* = 500

Nominal monetary base: MB = 960

Currency-deposit ratio: cu = 0.5

The aggregate demand for goods is a decreasing function of the real interest rate:

Y = .6/(.001) – r/(.001)

In this question the real interest rate r is written in decimal form. (I.e., if the interest rate

is 5% then r=0.05.)

 

(a) Suppose that the reserve-deposit ratio is res = 0.1 and that the economy is in the

long-run equilibrium.

(i) What is the value of the money multiplier?

(ii) What is the value of the nominal money supply?

(iii) What are the nominal values of deposits, currency, and reserves?

(iv) What is the value of the real interest rate in the long-run equilibrium?

Hint: You know full-employment output.

(v) What is the value of the price level in the long-run equilibrium?

Hint: You know full-employment output and the money supply.

(vi) What is the value of velocity of money in the long-run equilibrium?

 

(b) Suppose that, as a result of a financial crisis, banks become reluctant to make loans

and they want to increase their reserve holdings relative to deposits. Specifically, the

reserve-deposit ratio increases dramatically to res = 0.7. For parts (i)-(iv), the central

bank maintains the value of monetary base equal to 960.

(i) What is the new value of the money multiplier?

(ii) What is the new value of the nominal money supply?

(iii) Suppose that the price level remains fixed at the value you found in (a) part (v).

Given the new value of the nominal money supply, what are the short-run

equilibrium values of output and the real interest rate?

(iv) What is the new long-run equilibrium value of the price level?

(v) Now suppose that the central bank wants to maintain short-run equilibrium

output and the price level at their long-run equilibrium values (that you found in

part (a)). What do they have to set the monetary base to in order for this to

occur?Consider the following Keynesian closed economy model.

Real money demand: L = 0.2Y – 200r

Full-employment equilibrium output: Y* = 500

Nominal monetary base: MB = 960

Currency-deposit ratio: cu = 0.5

The aggregate demand for goods is a decreasing function of the real interest rate:

Y = .6/(.001) – r/(.001)

In this question the real interest rate r is written in decimal form. (I.e., if the interest rate

is 5% then r=0.05.)

 

(a) Suppose that the reserve-deposit ratio is res = 0.1 and that the economy is in the

long-run equilibrium.

(i) What is the value of the money multiplier?

(ii) What is the value of the nominal money supply?

(iii) What are the nominal values of deposits, currency, and reserves?

(iv) What is the value of the real interest rate in the long-run equilibrium?

Hint: You know full-employment output.

(v) What is the value of the price level in the long-run equilibrium?

Hint: You know full-employment output and the money supply.

(vi) What is the value of velocity of money in the long-run equilibrium?

 

(b) Suppose that, as a result of a financial crisis, banks become reluctant to make loans

and they want to increase their reserve holdings relative to deposits. Specifically, the

reserve-deposit ratio increases dramatically to res = 0.7. For parts (i)-(iv), the central

bank maintains the value of monetary base equal to 960.

(i) What is the new value of the money multiplier?

(ii) What is the new value of the nominal money supply?

(iii) Suppose that the price level remains fixed at the value you found in (a) part (v).

Given the new value of the nominal money supply, what are the short-run

equilibrium values of output and the real interest rate?

(iv) What is the new long-run equilibrium value of the price level?

(v) Now suppose that the central bank wants to maintain short-run equilibrium

output and the price level at their long-run equilibrium values (that you found in

part (a)). What do they have to set the monetary base to in order for this to

occur?Consider the following Keynesian closed economy model.

Real money demand: L = 0.2Y – 200r

Full-employment equilibrium output: Y* = 500

Nominal monetary base: MB = 960

Currency-deposit ratio: cu = 0.5

The aggregate demand for goods is a decreasing function of the real interest rate:

Y = .6/(.001) – r/(.001)

In this question the real interest rate r is written in decimal form. (I.e., if the interest rate

is 5% then r=0.05.)

 

(a) Suppose that the reserve-deposit ratio is res = 0.1 and that the economy is in the

long-run equilibrium.

(i) What is the value of the money multiplier?

(ii) What is the value of the nominal money supply?

(iii) What are the nominal values of deposits, currency, and reserves?

(iv) What is the value of the real interest rate in the long-run equilibrium?

Hint: You know full-employment output.

(v) What is the value of the price level in the long-run equilibrium?

Hint: You know full-employment output and the money supply.

(vi) What is the value of velocity of money in the long-run equilibrium?

 

(b) Suppose that, as a result of a financial crisis, banks become reluctant to make loans

and they want to increase their reserve holdings relative to deposits. Specifically, the

reserve-deposit ratio increases dramatically to res = 0.7. For parts (i)-(iv), the central

bank maintains the value of monetary base equal to 960.

(i) What is the new value of the money multiplier?

(ii) What is the new value of the nominal money supply?

(iii) Suppose that the price level remains fixed at the value you found in (a) part (v).

Given the new value of the nominal money supply, what are the short-run

equilibrium values of output and the real interest rate?

(iv) What is the new long-run equilibrium value of the price level?

(v) Now suppose that the central bank wants to maintain short-run equilibrium

output and the price level at their long-run equilibrium values (that you found in

part (a)). What do they have to set the monetary base to in order for this to

occur?Consider the following Keynesian closed economy model.

Real money demand: L = 0.2Y – 200r

Full-employment equilibrium output: Y* = 500

Nominal monetary base: MB = 960

Currency-deposit ratio: cu = 0.5

The aggregate demand for goods is a decreasing function of the real interest rate:

Y = .6/(.001) – r/(.001)

In this question the real interest rate r is written in decimal form. (I.e., if the interest rate

is 5% then r=0.05.)

 

(a) Suppose that the reserve-deposit ratio is res = 0.1 and that the economy is in the

long-run equilibrium.

(i) What is the value of the money multiplier?

(ii) What is the value of the nominal money supply?

(iii) What are the nominal values of deposits, currency, and reserves?

(iv) What is the value of the real interest rate in the long-run equilibrium?

Hint: You know full-employment output.

(v) What is the value of the price level in the long-run equilibrium?

Hint: You know full-employment output and the money supply.

(vi) What is the value of velocity of money in the long-run equilibrium?

 

(b) Suppose that, as a result of a financial crisis, banks become reluctant to make loans

and they want to increase their reserve holdings relative to deposits. Specifically, the

reserve-deposit ratio increases dramatically to res = 0.7. For parts (i)-(iv), the central

bank maintains the value of monetary base equal to 960.

(i) What is the new value of the money multiplier?

(ii) What is the new value of the nominal money supply?

(iii) Suppose that the price level remains fixed at the value you found in (a) part (v).

Given the new value of the nominal money supply, what are the short-run

equilibrium values of output and the real interest rate?

(iv) What is the new long-run equilibrium value of the price level?

(v) Now suppose that the central bank wants to maintain short-run equilibrium

output and the price level at their long-run equilibrium values (that you found in

part (a)). What do they have to set the monetary base to in order for this to

occur?