Consider the Neo-Keynesian model of money and banking. Suppose that the demand for money function was MD = 4 Y - 1 000 i where MD is the quantity of money demanded, i is the rate of interest (an interest of 5 means 5 percent in this problem), and Y is real national income which currently is 1 500. The supply of money is 1 000, the target reserve ratio is 10 percent, there is no cash drain in the banking system, and the recessionary gap is 250. The price level does not change in this problem. Suppose the Bank of Canada reduces the target for the overnight rate prompting commercial banks to reduce the market rate of interest to 4 percent. Are the commercial banks experiencing now a situation of excess cash reserves or of too little cash reserves? What is the size of this excess/insufficient cash reserves when Y = 1 500? What will the commercial banks do to eliminate this excess/insufficient cash reserves? By how much should the level of cash reserves of the banking system change for the economy to move to full employment?
Consider the Neo-Keynesian model of money and banking. Suppose that the demand for money function was MD = 4 Y - 1 000 i where MD is the quantity of money demanded, i is the rate of interest (an interest of 5 means 5 percent in this problem), and Y is real national income which currently is 1 500. The supply of money is 1 000, the target reserve ratio is 10 percent, there is no cash drain in the banking system, and the recessionary gap is 250. The price level does not change in this problem. Suppose the Bank of Canada reduces the target for the overnight rate prompting commercial banks to reduce the market rate of interest to 4 percent. Are the commercial banks experiencing now a situation of excess cash reserves or of too little cash reserves? What is the size of this excess/insufficient cash reserves when Y = 1 500? What will the commercial banks do to eliminate this excess/insufficient cash reserves? By how much should the level of cash reserves of the banking system change for the economy to move to full employment?
Chapter15: Macroeconomic Viewpoints: New Keynesian, Monetarist, And New Classical
Section: Chapter Questions
Problem 6E
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Consider the Neo-Keynesian model of money and banking. Suppose that the demand for money function was MD = 4 Y - 1 000 i where MD is the quantity of money demanded, i is the rate of interest (an interest of 5 means 5 percent in this problem), and Y is real
- Suppose the Bank of Canada reduces the target for the overnight rate prompting commercial banks to reduce the market rate of interest to 4 percent. Are the commercial banks experiencing now a situation of
excess cash reserves or of too little cash reserves? What is the size of this excess/insufficient cash reserves when Y = 1 500? - What will the commercial banks do to eliminate this excess/insufficient cash reserves? By how much should the level of cash reserves of the banking system change for the economy to move to full employment?
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