1/4/2014 Econ 101 Tutorial

Q1
a)

The equilibruim nominal interest rate is 4%

b) If the real GDP increases the demand for money increases and the curve will shift to the right and the equilibrium level of the interest rate will also increase.

Q2 a) The Monetary base increases to $1,200 billion

b) In the q is 50%, the deposits have to be double the currency if that makes sense, therefore the currency will be one part and the deposits will be 2 parts, all together there's 3 parts, therefore 2/3 x 1200 = $800 billion

c) $400 bill as it's the other 1/3.

d) Because the bank have excess reserves, meaning they have more than the 10% reserve ratio therefore they can afford to do a second round.

e) Money Multiplier = (1 + Currency drain ratio) / ( currency drain ratio + desired reserve ratio)
= (1 + 0.5) / (0.5 + 0.1)
= 2.5
Increased the currency drain ratio to 60%
= (1 + 0.6) / (0.6 + 0.1)
= 2.29 If the currency drain ratio increases then the Money Multiplier will decrease.

f) = (1 + 0.5) / (0.5 + 0.05)
=2.73
If the desired ratio decreased to 5% the money multiplier would increase

Q3 a) The fact that the education system of Zimbabwe was the best in Africa now changing to going to school not being an option having to work to live for minimal food.

b) A possible way of lowering the inflation rate within Zimbabwe is for the government to stop printing money to finance its expenditures. Just because the government has reported the change of the currency unit taking off ten zeros this does not change the effect of inflation but only the units in which prices are measured.