Lahore University of Management Sciences ECON3610 - Money and Banking Spring 2015 Quiz 2 (Weight: 5%; Marks: 50) Time: 30 Minutes Student Roll No. Student Name Question 1: (1.5%; 15 Marks) Consider an economy in which the only type of liquidity is transaction deposit, and banks never desire to hold excess reserves. The required reserve ratio for transaction deposits is 0.50 (50%). In addition, the monetary base is $100 billion, and the total quantity of money is $150 billion. What is the nonbank public's desired ratio of currency to demand deposits? MA oa:Question 2 (1.5%; 15 Marks) What do you predict would happen to the money supply if expected inflation suddenly increased? [Hint: Make use of the components of money multiplier and economic reasoning to changes in money multiplier to answer this question.| FE R \ = Page |2 Whew KY =p ie 1 Mop ws dono’ “Question 3 (2.0%; 20 Marks) Suppose that short-term interest rates fall during recessions and rise during expansions. What would you expect the slope of the yield curve to be (according to the expectations theory) when (a) the economy is at a peak and a recession is beginning; (b) the economy is midway between a peak and a trough; (¢) the economy is in a trough, and an expansion is beginning and (d) the economy is midway between a trough and a peak? Briefly justify your answer.