Montary Base

1) We learned that the monetary base M^B is equal to the sum of the fraction of deposits held as reserves by banks, bD, and the fraction of deposits held as cash by the public, pD: M^B=bD+pD However, the size of the money supply is given by the sum of total deposits and the currency in circulation (i.e. the fraction of deposits held as cash by the public): M^s=D+pD Using the above two equations, derive the following equation which tells us that the money supply is equal to the size of the monetary base times the money multiplier: M^s=(1+p)/(b+p) M^B (2) We derived that national saving is equal to the sum of domestic private investment spending and net exports: NS=I+NX Using this equation, briefly explain (3 to 5 sentences) why we frequently see a nation have the “twin deficits” of a government budget deficit and a trade deficit.            

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