Q1. Assume that in an economy velocity of money is constant. The output grows by 5 % per year, the money stock grows by 14 % per year and the nominal interest rate is 11 %. Determine the real interest rate?
Q2. Suppose that the quantity theory of money holds and the velocity of money are constant at 5. The output is fixed at its full employment value of 10,000 and the price level is 2.
a) Find out nominal and real demand for money.
b) In similar economy the government fixes the nominal money supply at 5000. With output fixed at its full employment level and with the supposition that prices are flexible, determine the price level?
Q3. Assume that the required reserve ratio is 0.12 for deposits and there are no surplus reserves. Assume that the total demand for currency is equivalent to 0.3 times deposits.
a) If the total reserves are Rs. 40 billion, find out the level of money supply?
b) Determine, how much does the money supply change if central bank raises the required reserve ratio to 0.20? Suppose that the total reserves are unchanged at Rs. 40 billion.