Suppose that in Mysore,the reserve-deposit ratio is res = 0.5 - 2i,where i is the nominal interest rate.The currency-deposit ratio is 0.2 and the monetary base equals 100.The real quantity of money demanded is given by the money demand function L(Y,i)= 0.5Y - 10i,where Y is real output.Currently,the real interest rate is 5% and the economy expects an inflation rate of 5%.The reserve-deposit ratio equals

Question

Quizplus · Accepted Answer

To find the reserve-deposit ratio, we need to use the following formula:

reserve-deposit ratio (res) = currency-deposit ratio / (1 + currency-deposit ratio) * (required reserve ratio)

We are given that the currency-deposit ratio is 0.2. To find the required reserve ratio, we can use the reserve-deposit ratio equation given in the problem:

res = 0.5 - 2i

At the current interest rate of 5%, i = 0.05, so:

res = 0.5 - 2(0.05) = 0.4

Now we can plug in the given values to find the reserve-deposit ratio:

res = 0.2 / (1 + 0.2) * 0.4 = 0.3

Therefore, the answer is C) 0.3.

Suppose That in Mysore,the Reserve-Deposit Ratio Is Res = 0