Assume the required reserve ratio in the country of Rayogi is 5 percent, and the banking system in Rayogi has limited reserves. (a) If Rayogi's central bank sells $10 million of securities to commercial banks and the commercial banks pay for the securities out of their reserves, calculate the maximum possible change in the money supply. Show your work. (b) Draw a correctly labeled graph of the money market, and show the effect of the change in the money supply identified in part (a) on the equilibrium nominal interest rate in Rayogi. (c) Assume no change in inflationary expectations. Based on the change in the nominal interest rate identified in part (b), what will happen to the real interest rate in Rayogi? (d) Based on your answer to part (c), what will happen to the economic growth rate in Rayogi? Explain.
Assume the required reserve ratio in the country of Rayogi is 5 percent, and the banking system in Rayogi has limited reserves. (a) If Rayogi's central bank sells $10 million of securities to commercial banks and the commercial banks pay for the securities out of their reserves, calculate the maximum possible change in the money supply. Show your work. (b) Draw a correctly labeled graph of the money market, and show the effect of the change in the money supply identified in part (a) on the equilibrium nominal interest rate in Rayogi. (c) Assume no change in inflationary expectations. Based on the change in the nominal interest rate identified in part (b), what will happen to the real interest rate in Rayogi? (d) Based on your answer to part (c), what will happen to the economic growth rate in Rayogi? Explain.
Chapter14: Banking And The Money Supply
Section: Chapter Questions
Problem 3.4P
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VIEWStep 2: Find the maximum possible change in the money supply
VIEWStep 3: Show part a in a diagram
VIEWStep 4: Explain the effect on real interest rate from part b explanation
VIEWStep 5: Explain the effect on the economic growth rate from part c explanation
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