Larry consumes at a point on his budget line where his marginal ...

[jjjetplane]

Larry consumes at a point on his budget line where his marginal rate of substitution is less than the magnitude of the slope of his budget line. As Larry moves toward his consumer equilibrium point, he will move to a
 
  A) lower budget line.
  B) higher budget line.
  C) lower indifference curve.
  D) higher indifference curve.

Question 2

In the economy of Brightland, the commercial banks have deposits of 600 billion. Their reserves are 60 billion. All reserves are in deposits with the Central Bank and the commercial banks hold no excess reserves.
 
  There is 120 billion in Central Bank notes outside the banks, and there are no coins. a) What is the economy's monetary base? b) What is the quantity of money in the economy? c) Calculate the money multiplier. d) Suppose the Central Bank of Brightland undertakes an open market purchase of securities of so that the monetary base increases by 5 billion. By how much will the quantity of money change?

[xthemafja]

Answer to Question 1

D

Answer to Question 2

a) The monetary base is the sum of Central Bank notes and deposits at the Central Bank, so the monetary base is 120 billion + 60 billion= 180 billion.
b) The quantity of money equals notes plus deposits, which is 120 billion + 600 billion = 720 billion.
c) The money multiplier is (1+c)/(r + c), where c is the ratio of currency to deposits and r is the desired reserve ratio. In Brightland, the ratio of currency to deposits is
120 billion/600 billion = 0.2. Because there are no excess reserves, the desired reserve ratio is 60 billion/600 billion = 0.1. So the money multiplier is (1 + 0.2 )/(0.1 + 0.2 ) = 4.0.
d) The quantity of money in the economy increases by the change in the monetary base multiplied by the money multiplier, so the quantity of money increases by
5  4 billion = 20 billion.

[jjjetplane]

Correct answers!

[xthemafja]

Great! Please up vote