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Use the subsequent money demand equation and Compute monetary base

Consider the subsequent money demand equation:

427_money demand equation 1.jpg


The notation is the same as in class. Suppose which the required reserve ratio is .1 and people do not hold currency.

1) If the Fed wants to set an interest rate R=5, illustrate what must the monetary base be?

2) During Christmas time, people demand more money and the money demanded equation becomes.

59_money demand equation 2.jpg

Assuming the Fed does not change the money supply, illustrate what will the interest rate become?

3) illustrate what monetary base would the Fed have to set in order to set the interest rate back to its target of 5?

 

Business Economics, Economics

  • Category:- Business Economics
  • Reference No.:- M917551

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