ECONOMICS TUTOR ASAP (PART1) Please answer A and B only: Consider an economy in
ID: 1198445 • Letter: E
Question
ECONOMICS TUTOR ASAP (PART1) Please answer A and B only:
Consider an economy in which people wish to hold money balances worth a total of 5 million goods. They are indifferent between money issued by the central bank andmoney issued by private banks (as long as both offer the same rate of return). In the initial period, the central bank issues $1 million and uses the proceeds to purchase capital. The central bank owns a stock of capital equal to its stock of money and usesthe return to pay interest on its money. Assume that x=1.2 and a dollar always buystwo goods. Intermediation, including the payment of interest on money, is costless.
a) What rate of interest must the central bank offer to induce people to accept its money? Does this satisfy the central bank’s budget constraint?
b) What is the real value of the total amount of money issued by private banks?
Explanation / Answer
ECONOMICS TUTOR ASAP (PART1) Please answer A and B only: Consider an economy in
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