Explain what will happen to the quantity of money in the following situations. The reserve ratio is 10% initially. The BOJ conducts open market purchases and buys ¥1 billion of bonds from banks. A bank takes out a discount loan of ¥500 million from the BOJ. All banks increase the reserve ratio from 10% to 20%. By introducing the negative interest rate policy, the BOJ increases the banks’ cost of holding excess reserves. During a banking crisis, depositors withdraw money from their bank accounts.
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.
Explain what will happen to the quantity of money in the following situations. The
reserve ratio is 10% initially.
- The BOJ conducts open market purchases and buys ¥1 billion of bonds from banks.
- A bank takes out a discount loan of ¥500 million from the BOJ.
- All banks increase the reserve ratio from 10% to 20%.
- By introducing the negative interest rate policy, the BOJ increases the banks’ cost of holding
excess reserves .
- During a banking crisis, depositors withdraw money from their bank accounts.
Step by step
Solved in 2 steps
