Assignment
1.) The loanable funds market
Demand and Supply
|
Real interest rate
|
Loanable funds demanded
|
Loanable funds
supplied
|
|
(percent per year)
|
(million Saudi Riyal)
|
|
5
|
900
|
500
|
|
5.5
|
850
|
550
|
|
6
|
800
|
600
|
|
6.5
|
750
|
650
|
|
7
|
700
|
700
|
|
7.5
|
650
|
750
|
|
8
|
600
|
800
|
a.) Draw the supply and demand balance of the above loanable funds market. What is the equilibrium interest rate and equilibrium loanable funds level?
b.) What is going to happen to the equilibrium interest rate and equilibrium loanable funds level, when there is an increase in expected future income?
2.) Money creation process
Banks in New Transylvania have a desired reserve ratio of 15% of deposits and no excess reserves. Households want to keep 8% of their money as currency. Now suppose that the Central Bank increases the monetary base by $12,000 billion.
a.) How much do the banks lend in the first round of the money creation process?
b.) How much of the initial amount lent flows back to the banking system as new deposits?
c.) How much do the banks lend in the second round of the money creation process?
d.) Show with the help of a graph of the money market what happens to the interest rate as a result of the increase in the monetary base by the Central Bank. (No actual numbers needed)
e.) In the long run, what is going to happen to the price level when the monetary base increases and the economy is at full capacity?