Suppose the banks in an economy have a reserve-deposit ratio of 10 percent and the currencydeposit ratio is 20 percent. a. If the Central Bank increases the monetary base by $400 through open market operations, what will be the increase in the money supply? b. If the Central Bank increases the discount rate and firms react by increasing the reservedeposit ratio to 15 percent, what is the change in the multiplier? Will this change increase or decrease the money supply?
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.
Suppose the banks in an economy have a reserve-deposit ratio of 10 percent and the currencydeposit ratio is 20 percent.
a. If the Central Bank increases the monetary base by $400 through open market operations, what will be the increase in the money supply?
b. If the Central Bank increases the discount rate and firms react by increasing the reservedeposit ratio to 15 percent, what is the change in the multiplier? Will this change increase or decrease the money supply?
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