Suppose the Reserve-Deposit Ratio Is Res = 0

question 14

Short Answer

Suppose the reserve-deposit ratio is res = 0.5 - 2i,where i is the nominal interest rate.The currency-deposit ratio is 0.2 and the monetary base equals 100.The real quantity of money demanded is given by the more demand function L(Y,i)= 0.5Y - 10i,where Y is real output.Currently the real interest rate is 5% and the economy expects an inflation rate of 5%.Assume the price level P is equal to 1.
a.Calculate the money multiplier.
b.Calculate the reserve-deposit ratio.
c.Calculate the money supply.
d.Calculate the value of output Y that clears the asset market.

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Definitions:

Collateralized Debt Obligation

A complex structured finance product that pools together cash flow-generating assets and repackages this asset pool into tranches that can be sold to investors.

CDO

Collateralized Debt Obligation, a type of structured asset-backed security (ABS) with multiple tranches that is issued by special purpose entities and collateralized by debt obligations.

Zero-Coupon Bond

A bond that does not pay periodic interest payments and is instead issued at a significant discount to its face value and pays its full face value at maturity.

Yield To Maturity

The total return anticipated on a bond if it is held until its maturity date, taking into account its current market price, par value, coupon interest rate, and time to maturity.