Answered: Using the following information, derive…

Using the following information, derive the Monetary Rule (MR) for this central bank: - Loss function: L = (yt − ye)² + 0.5(π – π²)² Phillips Curve: πt = πt-1 + α(yt — Ye)

Survey Of Economics

10th Edition

ISBN:9781337111522

Author:Tucker, Irvin B.

Publisher:Tucker, Irvin B.

Chapter19: Money Creation

Section: Chapter Questions

Problem 14SQ

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Concept explainers

Required Reserve and Excess Reserve Analysis

A required reserve is an amount of cash that banks must keep with themselves, which is certain percentage of the deposits made by their customers. Required reserve is a percentage of the bank's deposits that the respective bank must have on each overnight. The percentage rate is set and determined by the nation’s central bank. It is important to have such funds accumulated to meet its uncertain obligations, sudden liabilities and withdrawals. Required reserve is also known as reserve ratio. Reserve ratio is an important tool to control the money supply.

Question

In which ⍺=5

Using the following information, derive the Monetary Rule (MR) for this central bank:
Loss function: L = (yt − ye)² + 0.5(π – µ²)²
Phillips Curve: π = πt−1 + α(yt − Ye)

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