Consider the model of supply and demand for central bank money. Assume that there there are commercial banks. Suppose that people hold 20% of their money in currency and 80% of their money in deposits. The central bank sets the reserve-todeposit ratio at 10%. In the first period, the central bank increases the supply of money by $200, buying bonds through Open-Market Operations. Use this information to answer the following questions: (a) For the second period (after the central bank has injected $200 in the economy), calculate: (i) the demand for currency, (ii) the amount of deposit held at the commercial banks, (iii) the demand for reserves held at the central bank, and (iv) the demand for the high-powered money. How much is the additional money supply created at the end of the second period? 2 (b) How much is the additional money supply created at the end of the third period? (c) As time continues, additional money supply will be created. Calculate the total increase in the money supply as a consequence of the initial $200 increase in the money supply by the central bank.
IS-LM-PC Analysis
The IS (Investment Saving), LM (Liquidity Preference- Money Supply), and PC (Philips Curve) is the model that looks at the dynamics of output and inflation. It takes into account the central bank policy decision to adjust the inflation and real interest rate in the economy. It enables the economist to weather to priorities between employment and inflation rate analyzing the model. It is a practice-driven approach adopted by economists worldwide.
IS-LM Analysis
The term IS stands for Investment, Savings, and LM stands for Liquidity Preference, Money Supply. Therefore, the term IS-LM model is known as Investment Savings – Liquidity preference money Supply. This model was introduced by a Keynesian macroeconomic theory which shows the relationship between the economic goods market and loanable funds market or money market. In other words, it shows how the market for real goods interacts with the financial markets to strike a balance between the interest rate and total output in the macroeconomy. This particular model is designed in the form of a graphical representation of the Keynesian economic theory principle. The output and money are the two important factors in an economy.
Consider the model of
that there there are commercial banks. Suppose that people hold 20% of their money
in currency and 80% of their money in deposits. The central bank sets the reserve-todeposit ratio at 10%. In the first period, the central bank increases the supply of money
by $200, buying bonds through Open-Market Operations. Use this information to answer
the following questions:
(a) For the second period (after the central bank has injected $200 in the
economy), calculate: (i) the demand for currency, (ii) the amount of deposit held at
the commercial banks, (iii) the demand for reserves held at the central bank, and
(iv) the demand for the high-powered money. How much is the additional money
supply created at the end of the second period?
2
(b) How much is the additional money supply created at the end of the third
period?
(c) As time continues, additional money supply will be created. Calculate
the total increase in the money supply as a consequence of the initial $200 increase
in the money supply by the central bank.
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