Category: Economics

➤ How much can the bank lend after the deposit fall if it loans all excess reserves?
After the $25 million outflow, the bank’s excess reserves are $374.0 million. If it lends all excess reserves, it can extend $374.0 million in new loans. The bank must retain required reserves of $51.0 million, so lending that $374.0 million does not violate the 12% requirement.

Model of Private Debt and Credit (30%). Refer to Theory Lecture 3 – OLG Model with Money in aProduction Economy. Refer to the section on the model of private debt and credit.
(a) Write down the lenders and borrowers constrained optimization problem, clearly identifying thechoice variables and the lifetime constraints. Do not substitute into the objective function. (5marks).
(b) Write out the lagrangian for the lenders problem and compute the FOC with respect to c1,l and c2,l,deriving the equilibrium condition: U1(c1,l,c2,l)U2(c1,l,c2,l)=r (5 marks).
(c) Write out the lagrangian for the borrowers problem. Write down the FOC with respect to c1,b andc2,b and derive the equilibrium condition: U1(c1,b,c2,b)U2(c1,b,c2,b)=r ( 10 marks).
(d) Now let the functional form for utility for both the lenders and borrowers be U(c1,c2)=ln(c1)+ln(c2). Derive the real interest rate, r and the competitive allocations for marks[DETAILED explanation is needed as I am stupid!]

Discussion Question 15-07a.
a.
A single commercial bank can safely lend only an amount equal to its excess reserves, but the commercial banking syotem as a whole can lend by a multiple of its excess reserves becouse one bank loses reserves to other benks, but the banking system as a whole does not. one bank gains reserves, but the banking system as a whole loses these reserves. the banking system as a whole has more funds than any single commercial bavk. this is a legal restriction placed on banks, but it does not apply to the banking system as a whole.
one bank loses reserves to other benks, but the banking system as a whole does not.
one bank gains reserves, but the banking system as a whole loses these reserves.
the banking system as a whole has more funds than any single commercial bavk.
this is a legal restriction placed on banks, but it does not apply to the banking system as a whole.
b.
The monetary mutiplier is defined as
1=R, where R is the required reserve ratio.
R=1, where R is the required reserve ratio.
M, where R is the required reserve ratio.
I R, where A is the requered restrve ratio.
c.
The moresary multipler is
divectly related to the reserve ratio.
imersely related to the reserve ratio.
equal to 1 plus the required reserve ratio.
equal to 1 minus the required reserve ratig.

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Scenario 20-6The after-school tutoring industry is competitive, and so is the labor market for after-school tutors. Suppose male and female tutors have equal experience and skill. Currently, some tutoring centers are biased and will only hire male tutors, whereas unbiased tutoring centers desire to hire the cheapest tutors and do not care about their genders. As a result, the equilibrium wage for male tutors is higher than that of female tutors.
Refer to Scenario 20-6. If consumers do not discriminate between biased and unbiased tutoring centers, thena. competition in the after-school tutoring industry will ensure the difference in wages will persist in the long run.
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c. unbiased tutoring centers will be more profitable than biased tutoring centers in the short run.
d. price of tutoring must increase in the short run to account for higher cost to biased tutoring centers.

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