Assignment 2

Q.1 Consider the following table where we assume that when a commercial bank receives it keeps
as a reserve and loan-out $ . The borrower immediately withdraws amount of money
and keep rest of the money in the bank as a demand deposit.
Deposit Reserve Loan Withdraw
$X
d (1-g)(1-d)X (1-g)(1-d)2X g (1-g)(1-d)2 X
(1-g)2(1-d)2 X d (1-g2)(1-d)2 X (1-g)2(1-d)3X g (1-g)2(1-d)X

(a) Derive both deposit and loan multipliers. (10+10)

(b) Derive money multiplier when money supply is defined as MS = CC + DD + TD and monetary base
is defined as MB = CC + R.

Where CC=cDD, TD = rDD, R = bDD 0<c<1, 0<r<1, 0<b<1

Q.2 Consider the following model

a. Give an economic interpretation of the last equation with reference to lean with the wind and lean
against the wind policy
b. Draw C, I, G against output Y
c. Using above model and determine equilibrium output, C, I and G.