Suppose that in Mysore,the reserve-deposit ratio is res = 0.5 - 2 i,
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 money multiplier equals

Question

Quizplus · Accepted Answer

The money multiplier can be calculated using the formula:
money multiplier = 1 / reserve-deposit ratio

In this case, the reserve-deposit ratio is given by:
res = 0.5 - 2i

At a nominal interest rate of 5%, we have:
res = 0.5 - 2(0.05) = 0.4

The currency-deposit ratio is given by:
c = 0.2

The monetary base is given by:
base = 100

The real quantity of money demanded is given by:
L(Y,i) = 0.5Y - 10i

At a real interest rate of 5%, we have:
L(Y,0.05) = 0.5Y - 0.5 = 0.5(Y - 1)

The expected inflation rate is 5%, so the nominal interest rate is:
i = 0.05 + 0.05 = 0.1

The real quantity of money supplied is given by:
M = base * (1 + c) = 100 * 1.2 = 120

The equilibrium real quantity of money is given by:
M = L(Y,i) = 0.5Y - 10i

Substituting the values, we get:
120 = 0.5Y - 10(0.1)
120 = 0.5Y - 1
0.5Y = 121
Y = 242

The velocity of money is given by:
V = Y / M = 242 / 120 = 2.017

The money multiplier is given by:
money multiplier = 1 / res = 1 / 0.4 = 2.5

But this calculation assumes that the monetary base is held constant, whereas in reality it will change as a result of changes in the demand for money. To take this into account, we can use the following formula for the money multiplier:
money multiplier = (1 + c) / (c + res)

Substituting the values, we get:
money multiplier = (1 + 0.2) / (0.2 + 0.4) = 1.2 / 0.6 = 2.4

Therefore, the best choice for the money multiplier is B) 2)40.

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