The Bank of Canada adopts a new monetary aggregate (M4). which is the sum of not
ID: 2494933 • Letter: T
Question
The Bank of Canada adopts a new monetary aggregate (M4). which is the sum of notes in circulation (C), chcquablc deposits (D) and credits (E). It is known that reserve (R) and notes in circulation are proportional to deposits, i.e. R = r middot D, C = c middot D, where c, r are constants between 0 and 1. The amount of credits, however, depends positively on deposits and negatively on notes in circulations, i.e. E = alpha middot D - beta middot C, where a, beta are constants between 0 and 1. (a) Derive an expression for the monetary base (MB) and money supply (MS). Your expression should involve only D and the constants (a, beta, c, r). (b) Derive an expression for the money multiplier. Your expression should involve only the constants (a, beta, c, r).Explanation / Answer
a)MB= total notes and currency = C+R= rD+cD=D(r+c)
MS= currency in circulation + demand deposit(checking acounts) = C+D=cD+D=D(1+c)
b)money multiplier=MS/MB = D(1+c) / D(1+r) = (1+c)/(1+r)
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