Ejercicio 3 - Mercats financers: diner, bancs i política mo… · Introducció a la Macroeconomia UPF 2024

a.1. What exact ratio is described? Is it a monetary policy instrument? Which institution decides its value?

Solución: Minimum reserve ratio (reserve requirement ratio, $\theta$). It is a monetary policy instrument decided by the Governing Council of the European Central Bank.

a.2. Explain the economic effects of reducing this ratio.

Solución: Lowering the ratio frees up liquidity for commercial banks, expands the money multiplier, increases money supply, and puts downward pressure on interest rates.

b. Evaluate the following assertion: "Households' demand for money does not depend on the interest rate because only bonds yield an interest return." Is it correct? Justify your answer.

Solución: The assertion is incorrect. The interest rate on bonds is the opportunity cost of holding money.

c. Compute the equilibrium interest rate.

Solución: 5 / 0.05

d. Illustrate the adjustment graphically.

Solución: Vertical money supply curve $M^s = 200\text{ €}$ and downward-sloping money demand curve $M^d$. A drop in $\text{€}Y$ shifts $M^d$ to the left, reducing equilibrium interest rate $i$.

d. Explain the mechanism.

Solución: A fall in nominal GDP reduces transactions and shifts money demand left, leading to an excess supply of money; agents buy bonds, driving bond prices up and interest rates down.

e. Suppose public confidence in the banking system increases significantly. How will this alter economic agents' portfolio choice between currency and deposits? What impact will this change exert on the money multiplier?

Solución: The ratio of currency to money $c$ decreases (agents hold more deposits and less cash), increasing the money multiplier.

f. Provide the mathematical expression for the money multiplier and define each variable.

Solución: $$mm = \frac{1}{c + \theta(1-c)}$$