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?

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.

anyone help?

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.

“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.

(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.

Scarcity of resources necessitates trade-offs, and trade-offs result in an opportunity costs.  Any decision that involves a choice between two or more options has an opportunity cost. 

The concept of ‘opportunity costs’ can be shown by using a Production Possibility Curve.  The Production Possibility Curve depicts the best possible combinations of two or more goods an economy can produce using all of the available resources.  It shows the trade-off between more of one good in terms of another.  The law of increasing opportunity costs is reflected in the shape of the Production Possibility Curve.  The curve is bowed out, which shows that when an economy wants to produce more of one product it must give up successively larger amounts of the other products it makes.  The slope of the curve conveys the trade-off in terms of opportunity cost of producing one good rather than another.  

Resources are not all the same.  For example, if an economy was producing say motor vehicles and nuts, some of its resources will be better suited for producing motor vehicles while others are better suited for gathering nuts.  Some people (resources) will be really good at gathering nuts, for example people who love to be outdoors instead of indoors, while others like to work inside on cars.  In large economies if we started to withdraw resources from one product for another product, eventually we would reassign those whose opportunity costs are highest, which shows the general principle that when resources have different costs, we should always exploit the resource with the lowest opportunity cost first.  This is called the ‘low hanging fruit principle’ which says when expanding the production of any good, first employ those resources with the lowest opportunity cost, and only afterward turn to resources with higher opportunity costs.

Because resources are not equally productive in all possible uses, shifting resources from one use to another brings the law of increasing opportunity costs into play.  The production of additional units of one product requires the sacrifice of increasing amounts of the other products so a society should first employ those resources that are relatively efficient at producing that good, only afterward turning to those that are less efficient.

Dear Professor Cram:

What is the relationship between inflation and the unemployment rate?

Denise, California

Thanks for your question, Denise.

The answer is not as simple as it used to be. For many years the popular theory has been there is a tradeoff between inflation and unemployment.

Inflation is basically too much money chasing too few goods, so prices continually escalate. The popular theory has been that the money supply impacts economic growth and easier money (lower interest rates) stimulates the economy, and increases employment (thereby lowering unemployment). Tighter fiscal policy restricts the economy, reducing employment and increasing unemployment. This monetarist policy has guided the Federal Reserve in trying to navigate the knife edge of economic growth without inflation for the past several decades.

Recent studies dispute the tradeoff effect in the long run, but allow for short-term impact of tightening and easing money supplies. This has brought about renewed calls for returning to the gold standard which would virtually eliminate inflation and eliminate the monetarist approach to economic governence. How then to avoid the cycles of economic growth and recession? It seems that the more we know the more we don't know.

I hope this helps. Let us know if you need anything else.