Suppose the interest rate which banks in Techland charge each ...

[Cooldude101]

Suppose the interest rate which banks in Techland charge each other for overnight loans is 5, the long-run nominal interest rate is 4.5, and the long-run expected inflation rate is 3.
 
  i) What is the long-run expected real interest rate?
  ii) How will the long-run expected real interest rate be affected if the central bank of Techland starts purchasing government bonds from banks?

Question 2

Mr. Garrison has recently obtained a bank card from South Park National Bank. Excited about the concept of using a little plastic card to get money from a machine, he quickly runs down to the nearest ATM and withdraws 500. This action has
 
  A) reduced the bank's required reserves by 25 assuming the reserve ratio is 5 percent.
  B) reduced the money supply by 500.
  C) increased the money supply by 500.
  D) not changed the money supply.

[wtf444]

Answer to Question 1

i) The long-run expected real interest rate can be obtained by subtracting the long-run expected inflation rate from the long-run nominal interest rate. Therefore, long-run expected real interest rate in this case is 4.5 - 3 = 1.5.
ii) If the central bank of Techland starts purchasing government bonds from private banks, the supply of reserves will increase. This will lead to a fall in the cost of borrowing funds for private banks. As a result, they will be able to make more loans. This will lead to a decrease in the long-run nominal interest rate. If the long-run expected inflation rate remains unchanged, the long-run expected real interest rate will fall.

Answer to Question 2

A

[Cooldude101]

Gracias!

[shailee]

Thanks for the timely response, appreciate it