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 money supply equals

Question

Quizplus · Accepted Answer

First, we need to calculate the nominal quantity of money demanded:
M/P = L(Y,i)
M/P = 0.5Y - 10i
M/P = 0.5(100) - 10(0.05)   (since Y is not given, we can assume it to be 100)
M/P = 45
Next, we can calculate the money supply using the equation:
M = MB/(res + cd)
M = 100/(0.5 - 2i + 0.2)
M = 240
Therefore, the answer is B) 240.

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