Suppose the reserve—deposit ratio is res = 0.5 - 2 i , where i is the nominal in

Question

Suppose the reserve—deposit ratio is

                        res = 0.5 - 2 i,

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 money demand function

                        L(Y, i) = 0.5Y - 10 i,

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.

(d) Calculate the value of output Y that clears the asset market.

Explanation / Answer

res = 0.5 - 2i = 0.5-2(0.10) = 0.3

Multiplier = (cu+1)/(cu+res) = (0.2+1)/(0.2+0.3) = 2.4

M s = multiplier * base = 2.4*100 = 240

M s = L

240 = 0.5Y - 10(0.10)

0.5Y = 240+1

Y= 241/0.5 = 482

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