Let the real money demand in the economy equal LD = 10 + 2Y – 8r. The price level P is fixed at P = 1. Y is the level of output and r is the rate of interest. What is the LM curve for this economy?

How does the money multiplier differ when currency holdings are zero, compared to when currency holdings are greater then zero?

If the currency -to-deposit ratio increases, what effect, if any, does this have on the monetary base, the money supply, total depsoits, and economic growth?

I'm doing this assignment and I'm totally lost,

U.S. :

d= 200 -40p

s= 40 +40p

Rest of the world:

d= 160 -40p

s= 80 +40p

The U.S. govenment imposes a quota of 32 units on its imports. Calculate the magnitude of deadweight loss resulting from the quota under the assumption that the U.S. is a small open economy?

If anyone knows about this it would great if you could help me out!

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Here is the problem:

Eastland's currency is called the eastmark, and Westland's currency is called westmark. The supply of and demand for eastmark are given as:

Demand=25,000-5000e+50,000(Re-Rw)

Supply=18,500+8,000e-50,000(Re-Rw) where nominal exchange rate e is measured as westmarks per eastmarks, and Re and Rw are the real inerest rates prevailing in Eastland and Westland.

If Re=Rw=0.10 or 10%, what is market equilibrium value of the eastmark?

Any help, pointer, or anything that you can offer will be greatly appreciated.

Let c_b = 0.2. Let the real money demand in the economy equal L^D = 10 + 2Y – 8r.  The price level P is fixed at P = 1. Y is the level of output and r is the rate of interest.  What is the LM curve for this economy?

anyone help?

Dear Professor Cram,

Could you please answer the following question for me?

Suppose that the public holds a cash/deposit ration of  c_p = 0.2, and the commercial banking sector holds a reserve/deposit ration of c_b = 0.2.  The monetary base is given by H = 50.

Find the value of the money multiplier and the total amount of money in the economy. How does the money multiplier change if the central bank raises the reserve requirement to c_b = 0.3? Briefly explain the economic reasoning for this change in the money multiplier.

____________

 

The Multiplier (M) for money is (1+C_p)/(C_p + C_b).

When C_p=0 the formula reduces to its simpler form of the inverse of reserves, or 1/ C_b.

For your question, we start with

C_p = 0.2 and  C_b = 0.2 so the multiplier is (1+0.2)/(0.2+0.2) = 1.2/0.4 = 3

The total money in the economy is M·H = 3·50 = 150

When the banking reserve requirement is increased to 0.3 the multiplier drops:

(1+0.2)/(0.2+0.3) = 1.2/0.5 = 2.4

This will reduce the total amount of money in the economy.

I hope this helps.

Good studying.

How about this one: 

“A given increase in the money supply will shift the LM curve farther to the right if money demand is more sensitive to the level of income”. True, false or uncertain? Briefly explain your answer.
Thanks, Katie

_____________

An increase in the money supply shifts the LM curve to the right, raising income and lowering the interest rate. It seems to me that if money demand is more sensitive to the level of income, this will reduce the shift of the LM curve to the right.

Dear Economics Community

Could you please answer me whether the following statement is true, false or uncertain and illustrate by graph please?

“Other things equal, an IS curve is steeper, the more sensitive consumption is to the rate of interest”. True, false or uncertain? Briefly explain your answer.

As I am stuck with some questions. I break them into topics. I hope you can respond to me quickly. Thanks, Katie
__________________

Katie,

This is a commonly asked question regarding the IS curve since it examines the very basis of the IS curve. The IS curve shows the combination of interest rates and national income that result in equilibrium in the goods market. The IS curve slopes downward because increases in the interest rate cause investment to fall, and thus reduce income through the multiplier:

(IS)    Y = C(Y, t) + I(i) + G + X(R) -M(R, Y), where R is the real exchange rate (eP* /P)

The slope depends of the responsiveness of investment to changes in the interest rate, and the magnitude of the autonomous investment multiplier. You plot Interest Rates on the Y-axis and National Income on the X-axis. Steepness then increases as the impact of interest rates decreases.

 

 

Curve IS is not as steep as curve IS¹. IS shows more impact on national income due to changes in interest rate, so LESS steepenss means MORE sensistivity.