Purchase Solution

the money supply of the whole economy

Not what you're looking for?

Ask Custom Question

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?

Attachments
Purchase this Solution
Solution Summary

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

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 ...

Purchase this Solution
Free BrainMass Quizzes
Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.

Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

View More Free Quizzes
Related BrainMass Solutions

  • Regulations and the Changing Financial Market Landscape

    In particular, you want to focus on regulation in the context of impacting the money supply.

  • Money Multiplier

    The money multiplier is the amount of money the banking system as a whole creates with each dollar of reserve. This is the expansion of the country's money supply that results from banks' ability to lend.

  • maximum amount of new loans

    Then, this effects the money supply of the whole economy.

  • The Concept of Aggregate Demand and Aggregate Supply

    504112 The Concept of Aggregate Demand and Aggregate Supply Define the terms macroeconomics, the multiplier, and aggregate demand and supply. Macroeconomics is the study of the totality of the economy. It studies the economy in whole or aggregates.

  • Macro economy

    The Neo-classical approach simply focuses on supply side and determines the monetary policy according to the supply and demand of money.

  • President Obama's stimulus program

    This situation will increase money supply in the economy as government spending will come into rotation in the U.S. economy, rather than going abroad on imported steel.

  • What does the Federal Reserve Board do to combat inflation when the economy is bad?

    What does the Federal Reserve Board do to combat inflation when the economy is bad? The Federal Reserve System can greatly impact the amount of money supply in the economy.

  • Importance of price stability

    Stable prices are a necessary condition for the economy to grow in a stable and sustainable way, and for the effective functioning of prices and money in the economy. Central Banks such as the U.S.

  • Fed monetary policies

    Monetary policy can be implemented by changing the size of the monetary base. This directly changes the total amount of money circulating in the economy.

View More Related Solutions