What is the level of excess reserves

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Assignment -

Q1. In the Keynesian Model assume the following information: C = 200 + 0. 5Y_d

Now suppose C = 200 + 0. 5Y_d, I = 30, G = 20 note that I, G, represents private investment, Government spending, respectively.

a) Find the AD curve and graph it for Y = 0, 10, 20

Now suppose C =200 + 0. 5Y_d, I = 30, G = 20, T = 10 here Y_d = Y-T-TR. Note that I, G, T, represents private investment, Government spending and lump-Taxes (a flat amount), respectively. Assume that TR = 0.

b) Find the AD curve and plot it on the same graph in part 'a' for Y = 0, 10, 20. Please explain any differences that you have observed when compared to part 'a'.

Now suppose C = 200 + 0. 5Y_d, I = 30, G = 20, T = tY here Y_d =Y - tY - TR. Note that I, G, T, represents private investment, Government spending, respectively. Note that "t" is a proportional tax (it is a percentage not a flat amount). Assume that t = 0.2.

c) Find the AD curve and plot it on a new graph for Y = 0, 10, 20. Please explain any differences you have observed when compared to part 'a' and 'b'.

For Question 1, Y_d = Y-T+TR NOT Y_d = Y-T-TR.

Q2. Suppose John makes new total deposits of $100,000 at Bank "B" and Tom receives a loans of $80,000 from Bank 'B'. Suppose the required reserve ratio is 0.2 or 20% (this is determined by the Fed).

a. What is the level of required reserves Bank "B" must hold after John makes his deposit?

b. What is the level of excess reserves?

c. Compute total reserves

d. Compute the money multiplier

e. Suppose required reserves increased by $30,000 by how much will money supply change, (assume everything else remains the same)?

For question 4: required reserves =0.2 of total deposits and so excess reserves =0.8 of total deposits. Total reserves = excess reserves + required reserves. After Tom received the loan, the excess reserves will reduce to zero.

Reference no: EM131943405

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