Suppose that the Central Bank has currently set the reserve requirements in the economy to be equal to 10%. Assume that there is no cash drain. Suppose also that in this economy there are $400 in initial deposits and $6,000 of cash. 6. Given the above, what is the total Money Supply (MS) in the economy? Now suppose that the economy’s demand for money (MD) is given by the following equation: MD=12,000−1,000r Where r is the interest rate in integers (e.g. at a 2% interest rate, r = 2). 7. What is the equilibrium quantity of money (M) and interest rate (r) in this economy? Now suppose that the Central Bank wants to close an output gap in the economy, and wants to raise the interest rate by 2% to do this. Assume that the Central Bank targets the Money Supply directly. 8) If the Central Bank wants to change the Money Supply by changing the quantity of cash in the market in order to achieve this interest rate increase, how much does it need to change the quantity of cash? [ [Note: the question is asking here about the cash balance, which begins at $6,000, not the total Money Supply]

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Suppose that the Central Bank has currently set the reserve requirements in the economy to be
equal to 10%. Assume that there is no cash drain. Suppose also that in this economy there are
$400 in initial deposits and $6,000 of cash.

6. Given the above, what is the total Money Supply (MS) in the economy?

Now suppose that the economy’s demand for money (MD) is given by the following equation:
MD=12,000−1,000r

Where r is the interest rate in integers (e.g. at a 2% interest rate, r = 2).

7. What is the equilibrium quantity of money (M) and interest rate (r) in this economy?


Now suppose that the Central Bank wants to close an output gap in the economy, and wants to
raise the interest rate by 2% to do this. Assume that the Central Bank targets the Money Supply
directly.

8) If the Central Bank wants to change the Money Supply by changing the quantity of cash
in the market in order to achieve this interest rate increase, how much does it need to
change the quantity of cash? [ [Note: the question is asking here about the cash balance,
which begins at $6,000, not the total Money Supply]