Question

Suppose that money demand is given by Upper M Superscript d Baseline equals $Y left parenthesis 0.21 minus 0.6 i right parenthesis where $Y is $130. Part 2 If the Federal Reserve sets an interest rate target of 8%, the money supply it must create is $21.06. (Round your response to two decimal places.) Part 3 If the Federal Reserve wants to decrease the interest rate i from 8 to 5%, the new level of the money supply it must set is $enter your response here. (Round your response to two decimal places.) Part 4 As a result of the decrease in the interest rate from 8 to 5%, the Federal Reserve's balance sheet ▼ expands contracts in terms of the assets and liabilities it holds 

          Suppose that money demand is given by
Upper M Superscript d Baseline equals $Y left parenthesis 0.21 minus 0.6 i right parenthesis
where $Y is $130.
Part 2
If the Federal Reserve sets an interest rate target of 8%, the money supply it must create is $21.06. (Round your response to two decimal places.)
Part 3
If the Federal Reserve wants to decrease the interest rate i from 8 to 5%, the new level of the money supply it must set is $enter your response here. (Round your response to two decimal places.)
Part 4
As a result of the decrease in the interest rate from 8 to 5%, the Federal Reserve's balance sheet 
▼ 
expands
contracts
 in terms of the assets and liabilities it holds
Show more…

Added by Christine E.

Principles of Economics
Principles of Economics
Gregory Mankiw 8th Edition
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Suppose that money demand is given by Upper M Superscript d Baseline equals $Y left parenthesis 0.21 minus 0.6 i right parenthesis where $Y is $130. Part 2 If the Federal Reserve sets an interest rate target of 8%, the money supply it must create is $21.06. (Round your response to two decimal places.) Part 3 If the Federal Reserve wants to decrease the interest rate i from 8 to 5%, the new level of the money supply it must set is $enter your response here. (Round your response to two decimal places.) Part 4 As a result of the decrease in the interest rate from 8 to 5%, the Federal Reserve's balance sheet ▼ expands contracts in terms of the assets and liabilities it holds
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Transcript

-
0:00 Hello everyone.
00:01 So, first part of the question says that at a reserve requirement of 5%, what is the value of money multiplier? so, we'll calculate money multiplier.
00:16 So, formula for calculating money multiplier is 1 divided by reserve ratio.
00:30 So, putting the values that is 1 divided by 0 .05 gives 20.
00:36 That is the answer.
00:39 Coming to next part of the question that says if the reserve requirement is 5 % and the fed increases reserves by $20 billion, what is the total increase in the money supply? so, money supply is equals to money multiplier multiplied by increased reserves.
01:23 Now, putting the values, we have already calculated money multiplier above that is 20 and increased reserves is $20 billion that is given in the question.
01:34 So, on solving this, we get $400 billion...
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