1) Suppose that a monopoly bank faces an upward sloping supply curve of deposits R(D) = 1 + 0

Economics Dec 12, 2020

1) Suppose that a monopoly bank faces an upward sloping supply curve of deposits R(D) = 1 + 0.02D, where (D) is the quantity of deposits and R(D) is the (gross) deposit rate.

If one unit of deposits invested in loans yields a (gross) return of 10, what is the quantity of deposits the bank will raise?

2. Now suppose that there are (N) banks facing the same supply curve as in #1 and the return on one unit of investment is 10. What quantity of deposits will each bank raise?

Expert Solution

1. The quantity of deposits supplied is 450.

To find the quantity supplied, substitute the return R(D) = 10 into the supply equation, we have:

10 = 1 + 0.02 D
9 = 0.02 D
D = 450

2. The total quantity supplied remains the same at 450 when the return is 10. But since there are now N banks, each bank will raise quantity of deposits equal = 450 / N.

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