# the money supply of the whole economy

Please see attachment.

Hello, I am having a huge test on Monday and these are a couple of practice questions in a study packet that resemble the questions on the test. I understand some aspects but I have trouble tying them all together to come to the right solution. Can someone please help me with thorough explanations and solutions to these problems?

1. Assume that the officials in Ecoland have compiled the following information about their economy for last year:

Y = 10,000

C = 6,000
T = 1,500

G = 1,700

The government uses the following equation for the investment function:

I = 3,300 - 100r

Where r = equal to Ecoland's real interest rate.

Calculate, then explain, the following:

. Private saving

. Public saving

. National saving

. Investment

. The equilibrium real interest rate

2. What is the effect of an increase in the quantity of money? What is the difference between real variables and nominal variables? Are these variables affected by the quantity of money? If so, how? Use examples from the text, the South University Online Library, or the Internet when answering this question.

3. What is the difference between the real exchange rate and the nominal exchange rate? If the nominal exchange rate goes from 120 to 160 pesos per dollar, what has happened to the value of a dollar? Use examples from the text and/or the internet when responding to this question.

4. Assume that the Bank of Ecoville has the following balance sheet and the Fed has a 10% reserve requirement in place:

BALANCE SHEET FOR ECOVILLE INTERNATIONAL BANK

ASSETS LIABILITIES

Cash $33,000 Demand deposits $99,000

Loans $66,000

Now assume that the Fed lowers the reserve requirement to 8%.

I. What is the maximum amount of new loans that this bank can make?

II. Assume that the bank makes these loans. What will the new balance sheet look like?

III. By how much has the money supply increased or decreased?

#### Solution Preview

1. Before beginning, note that the equations had some typographical errors in them and were unclear. You should be able to follow what I am doing anyway. First of all, it is important to realize that we are assuming a closed economy. Then, Y=C+I+G+NX = C+I+ G since NX=0. Then, we may begin by solving for investment since we know the values of the other quantities. I= Y-C - G. I think something is wrong with your equations but if you correct them, I am happy to help you with this computation. Now, I= 3300 - 100r. Solving for r, gives you the interest rate while I is National Saving, which is the same as investment. National Saving is the sum of private and public saving.

We can calculate these as follows:

We introduce a new variable into the equation: (Y − T − C) + (T − G) = I .

Additional Info:

The calculation may be done as follows: I=Y-C-G. This implies that 3300 - 100r = 10,000-6000 - 1700= 2300. Then 3300r -100r = 2300. Thus -100r =-1000 and r=10. Now, we have T=1500. then (Y − T − C) + (T − G) = I .

The first of these terms is private savings and the second is public. Thus, private saving = Y-T-C = 10000 - 1500 -6000=2500. Public Savings = (T-G)= 1500 - 1700 = -200. This means that the ...

#### Solution Summary

Changes in the money supply of the whole economy within this case are noted.