Problem 5. Supplement the following graph, assuming that the money demand function (i.e. the demand for...

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Problem 5. Supplement the following graph, assuming that the money demand function (i.e. the demand for loans) is given by MD-P( 100-icom), where P is the price level and icoms the market interest rate in percentage points. The nominal interest rate set by the central bank is 5%, the mark- up of the commercial banks is 3 percentage points and the reserve ratio is 10%. The price level equals 2. What is the money supply in equilibrium? What is the amount of reserves? Reserves Loans Deposits

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Answer 1

Answer #1

Given nominal interest rate by central bank is 5%, and markup of commercial bank is 3%. Thus resultant market interest rate is 2%.

Given price level is 2.

Thus money demand is p(100- I)

Md is 196.

At equilibrium , money supply equals money demand.

Thus money supply is 196.

Also, reserve ratio given is 10%.

Thus amount reserved is 19.6.

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Answer 2

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