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

We can use the equation of the monetary base to find the money supply:
M = C + D
where M is the money supply, C is currency in circulation, and D is deposits in banks.
We are given that the currency-deposit ratio is 0.2, so
C = 0.2D
The reserve-deposit ratio is 0.5 - 2i, so
R = (0.5 - 2i)D
Therefore, we can write
M = C + R = 0.2D + (0.5 - 2i)D = (0.5 - 2i + 0.2)D = (0.7 - 2i)D
To find the value of D, we need to use the quantity theory of money:
M/P = kY
where M is the money supply, P is the price level, Y is real output, and k is a constant.
We can solve for P, using the fact that the real interest rate is i - 5%, or 0%, since the inflation rate is expected to be 5%:
P = M/(kY) = (0.7 - 2i)D/(kY)
i - 0 = (1/k)(0.7 - 2i)D/Y - 1
i = (0.7 - 2i)D/(kY) - 1
(1 + 2/k)i = 0.7D/(kY) - 1
i = (0.7/(1 + 2/k))D/(kY) - 1/(1 + 2/k)
We are given that the real interest rate is 5%, so
0.05 = (0.7/(1 + 2/k))D/(kY) - 1/(1 + 2/k)
Solving for D, we get
D = (0.05 + 1/(1 + 2/k))/(0.7/(1 + 2/k))kY
Plugging in k = 1 and Y = 1, we get
D = (0.05 + 1/3)/(0.7/3) = 240
Therefore, the money supply is
M = (0.7 - 2i)D = (0.7 - 2*0.05)*240 = 240
so the answer is B).

Suppose That in Mysore,the Reserve-Deposit Ratio Is