# Econ 4081 Problem Set 2

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• Published : March 6, 2013

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ECON 4081 Problem Set Two
1
Money Supply = m x Monetary base
m = (1+cr)/(cr + rr)
a. cr = 1; rr = 0; MS1 = \$1000 (2/1) = \$2000
b. cr = 0; rr = 1; MS2 = \$1000 (1/1) = \$1000
c. cr = 0; rr = 0.2; MS3 = \$1000 (1/0.2) = \$5000
d. cr = 1; rr = 0.2; MS4 = \$500 (2/1.2)= \$5000/3 = 1666.67 e. Expected Money Supply = (1+10%) Money Supply
a: MS’ = 1.1 MS = \$2200, \$2200 = 2 Monetary base’; Monetary base’ = \$1100,so monetary base should increase \$100; b: MS’ = 1.1 MS = \$1100, \$1100 = Monetary base’; monetary base’ = \$1100, so monetary base should increase \$100; c: MS’ = 1.1 MS = \$5500, \$5500 = 5 Monetary base’; Monetary base’ = \$1100, so monetary base should increase \$100; d: MS’ = 1.1 MS = \$1833.33, \$1833.33 = (2/1.2) Monetary base’; Monetary base’ = \$1100, so monetary base should increase \$100.

2
a. Money multiplier = (1+cr) / (cr + rr), as currency-deposit ratio increases, reserve-deposit ratio keep constant, according to the Table 4-2 in Case Study, it shows the money multiplier: m’ = (1+ 0.41) / (0.41 + 0.14) = 2.56, the money multiplier decreases. Money Supply = m x Monetary base, so MS’ = m’ x Monetary base, because m’ decreases, MS’ should be decreases too. b. Money multiplier = (1+cr) / (cr + rr), as reserve-deposit ratio increases, currency-deposit ratio keep constant, according to the Table 4-2 in Case Study, it shows the money multiplier: m’’ = (1+ 0.17) / (0.17 + 0.21) = 3.07, the money multiplier decreases. Money Supply = m x Monetary base, so MS’ = m’ x Monetary base, because m’ decreases, MS’ should be decreases too c. In my opinion, both of reserve-deposit ratio and currency-deposit ratio’s change could contribute for the fall in the money supply.

3
a. The cost of inflation arises because high inflation let firms to change their posted prices. It is menu costs. Higher rate of inflation, then faster to renew the menu in restaurant. b. The cost of inflation that the inconvenience of living in a world with a...