Suppose that in Mysore, the reserve-deposit ratio is
res = 0.5 - 2 i,
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 multiplier equals
a. 4.00.
b. 2.40.c. 3.00.
d. 2.00.
Answer: B
FIN 201
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- Consider an economy that has the following monetary data. Currency held by the nonbank public = $300 Bank reserves = $50 Monetary base = $350 Deposits = $700 Money supply = $1000 The monetary base and the money supply are expected to grow at a constant rate of 20% per year. Inflation and expected inflation are 20% per year. Suppose that bank reserves and currency pay no interest, all currency is held by the public, and bank deposits pay no interest. What is the cost to the public of the inflation tax?
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