Question

2) Suppose you are presented with the following table, where all figures are rendered in billions of dollars: MMMF Reserves Small time deposits Savings deposits 7,700 8,200 Year Currency 2017 1,270 2018 1.330 Demand deposits 1,200 1,220 2,400 600 720 505 2,500 602 a. What is the monetary base in this economy in 2017 and 2018? b. What is M1 in this economy in 2017 and 2018? C. What is M2 in this economy in 2017 and 2018? d. Using Mi as the basis for monetary growth and assuming a constant velocity of money, if GDP grew by 1% between 2017 and 2018, what was the rate of inflation in 2017? e. Suppose you kept $1,000 in a bank on January 1" 2017 at 5% annual nominal interest rate, what will be the real interest return on your deposit?
all of them please <3

Answer 1

(a)

Calculate monetary base in 2017 -

Monetary base = Currency + Reserves

Monetary base = 1,270 + 2,400

Monetary base = 3,570

The monetary base in 2017 is 3,570.

Calculate monetary base in 2018 -

Monetary base = Currency + Reserves

Monetary base = 1,330 + 2,500

Monetary base = 3,830

The monetary base in 2018 is 3,830.

(b)

Calculate M1 in 2017 -

M1 = Currency + Demand Deposit

M1 = 1,270 + 1,200

M1 = 2,470

The M1 in 2017 is 2,470

Calculate M1 in 2018 -

M1 = Currency + Demand Deposit

M1 = 1,330 + 1,220

M1 = 2,550

The M1 in 2018 is 2,550

(c)

Calculate M2 in 2017 -

M2 = Currency + Demand Deposit + Saving Deposit + Small Time Deposit + MMMF

M2 = 1,270 + 1,200 + 7,700 + 505 + 600

M2 = 11,275

The M2 in 2017 is 11,275

Calculate M2 in 2018 -

M2 = Currency + Demand Deposit + Saving Deposit + Small Time Deposit + MMMF

M2 = 1,330 + 1,220 + 8,200 + 602 + 720

M2 = 12,072

The M2 in 2018 is 12,072

(d)

M1 in 2017 = 2,470

M2 in 2018 = 2,550

Calculate the growth rate of M1 -

Growth rate = [(M1 in 2018 - M1 in 2017)/M1 in 2017] * 100

Growth rate = [(2,550 - 2,470)/2,470] * 100

Growth rate = 3.24%

The growth rate of M1 is 3.24%

M1 is basis for monetary growth rate. This means that the growth rate of M1 is equal to growth rate of money supply.

So, growth rate of money supply is 3.24%.

Velocity is constant.

Growth rate of real GDP is 1%.

Calculate the rate of inflation -

Rate of inflation = Growth rate of money supply - Growth rate of real GDP

Rate of inflation = 3.24% - 1% = 2.24%

The rate of inflation is 2.24%

(e)

Annual nominal interest rate = 5%

Inflation rate = 2.24%

Real interest rate = Annual nominal interest rate - Inflation rate = 5% - 2.24% = 2.76%

Calculate the real interest return on deposit -

Real interest return = Amount of deposit * Real interest rate

Real interest return = $1,000 * 0.0276 = $27.6

So,

The real interest return on deposit will be $27.6