Assume the following I. The public holds no currency. Il. The ratio of reserves

Question

Assume the following I. The public holds no currency. Il. The ratio of reserves to deposits is 0.08. III. The demand for money is given by: M SY(0.83- 2.9i) Initially, the monetary base is $90 billion, and nominal income is $5,300 billion. Calculate the demand function for central bank money: Hd ( .08 ) × ( 5300 × ( .83-2.9i ) Calculate the equilibrium interest rate by setting the demand for central bank money equal to the supply of central bank money. The equlibrium interest rate is%. (Round your response to two decimal places.)

Explanation / Answer

The monetary base is the supply of central bank money. Therefore the supply of central bank money is $90 billion

By equalizing the supply and demand we get

.08*5300*(.83-2.9i)=90

424*(.83-2.9i)=90

351.92-1229.6i=90

1229.6i=261.92

i=0.2130

or i=21.30%

Therefore the equilibrium interest rate is 21.30%

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