A) You are given the following information on the macroeconomy: Consumption: 200

Question

A) You are given the following information on the macroeconomy:

Consumption:                 200 + 0.75Y

Investment:                    100 + 0.10Y

Government Spending   500

Exports                           100

Imports                           50 + 0.25Y

Compute the equilibrium level of income, the size of the multiplier, and the change in equilibrium income for an increase in autonomous consumption of $50 million.

B) Suppose the entire economy contains $5000 worth of one-dollar bills.

-If people fail to deposit any of the dollars but instead hold all $5000 as currency, how large is the money supply?

-If people deposit the entire $5000 worth of bills in banks that are required to observe a 100% reserve requirement, how large is the money supply?

-If people deposit the entire $5000 worth of bills in banks that are required to observe a 20% reserve requirement, how large is the money supply?

C) You are given the following information on the banking system.

Reserve requirement       rr = 0.08

Currency-deposit ratio   c = 0.10

Excess reserve ratio        e = 0.05

Compute the simple deposit and money multipliers.

Explanation / Answer

a) Equilibrium level of income:

Y = C + I + G + X - M

Y = 200 + 0.75Y + 100 + 0.10Y + 500 + 100 - 50 - 0.25Y

Y - 0.75Y - 0.10Y + 0.25Y = 200 +100 + 500 + 100 - 50

0.4Y = 850

Y = 850/0.4 = 2125   

Multiplier=1/0.4=2.5
Increase income=50x2.5=125.

b) i.  The amount of $5000 is the money supply.

ii. The amount of $5000 is the money supply. (Money multiplier x base money = 1 x 5000)

iii. The amount of $25000 is the money supply. (Money multiplier x base money = 5 x 5000)

c) Money multiplier = 1+ c/rr+e+c = 1 + 0.10 / 0.08 + 0.05 +0.10 = 4.78

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