Question 1: You are given the following information about the economy of Nocoin: the banks have deposits of $300 billion. Their reserves are $15 billion, two thirds of which is in deposits with the central bank. Households' and firms hold $30 billion in banknotes. There are no coins.
The banks have no excess reserves, suppose the Bank of Nocoin, the central bank, decreased bank reserves by $0.5 billion.
a. What happens to the Quantity of deposits?
b. What happens to the quantity of currency?
c. What happens to the quantity of money?
d. Calculate the money multiplier.
Question 2: Quantecon is a country in which the quantity theory of money operates. The country has a constant population, capital stock, and technology. In year 1, real GDP was $400 million, the price level was 200, and the velocity of circulation was 20. In year 2, the quantity of money was 20 percent higher than in year 1. In year 3, the quantity of money falls to one fifth of its level in year 2.
a. What is the quantity of money in year 3?
b. What is the price level in year 3?
c. What is the level of real GDP in year 3?
d. What is the velocity of circulation in year 3?
e. If it takes more than one year for the full quantity theory effect to occur, what do you predict happens to real GDP in Quanticon in year 3? Why?