a. Suppose that each of the economy’ s 600 young agents has deposits worth 100 g

Question

a. Suppose that each of the economy’ s 600 young agents has deposits worth 100 goods with a bank no matter what the rate of return. Assume that the reserve requirement is 10 percent and the monetary base is $3, 000. Let x > n.

i. What is the total nominal money stock?

ii. What is the value of a unit of fiat money?

iii. What is the price of a good in units of fiat money?

iv. How many goods would the government acquire if it increased the monetary base by 50 percent? v. What is the real value of investment by banks?

b. How would your answer to each question in part a change if the reserve requirement doubled to 20 percent? Explain each of these changes in your own words.

c. Suppose the reserve requirement stays at 10 percent but banks voluntarily hold an extra 10 percent of deposits as fiat money reserves. Would your answers to part b change?

Explanation / Answer

(i) Nominal money stock = 100 x 600 goods = 60,000 goods worth

(ii) Value of fiat money per unit = 60,000 / $3,000 = 20

(iii) Price per good = $3,000 / 60,000 = $0.05

(iv) New monetary base = $3,000 x 1.5 = $4,500

Total number of goods = $4,500 x 20 = 90,000

Additional goods required = 90,000 - 60,000 = 30,000

Note: First 4 sub-questions are answered.

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