If the nominal interest rate is the same as the real interest rate, then inflation must...
If the nominal interest rate is the same as the real interest rate, then inflation must be:
-higher than the nominal rate of interest.
-zero.
-lower than the nominal rate of interest.
-negative.
Assume that $1.6 million is deposited into a bank with a reserve requirement of 5 percent.
What is the money supply as a result?
If the government decides to raise the reserve requirement to 10 percent, what is the value of the money supply in this case?
Homework Answers
According to the Fisher equation, nominal interest rate = real interest rate + inflation rate. Hence, if the nominal and real interest rate are equal, it means that the inflation rate is zero.
Money supply = money multiplier * total deposits. Money multiplier = 1/ reserve requirement = 20.
Therefore money supply = 20 * 1.6 million = 32 million
If reserve requirement is now 10%, then money multiplier = 10.
Now, money supply = 10 * 1.6 million = 16 million.
Hence, as reserve requirement rises, the money supply in the economy decreases as reserves in banks go up.
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