2. According to Tobin's model of speculative money demand, an increase in de- fault risk on bonds increases the demand for money, which causes the LM curve to shift to the right.
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- 4. Suppose demand for real money balance is = 500 + 0.2Y –1000i. P If P = 10, Y= 1000, and I= 0.10, and the money market is in equilibrium, What is the equilibrium stock of nominal money? What is the velocity of money? Suppose there is an autonomous increase in money demand by 100, with a constant nominal money supply, P = 10, and Y= 1000, what is the equilibrium i? d. If the central bank wishes to maintain i = 0.10, what must the nominal money supply be? Draw and label completely a money market equilibrium diagram. Label equilibrium M/P and i with their actual values. Draw and carefully label the changes that result from (c) and (d) above. a. с. е.The demand curve and supply curve for one-year discount bonds with a face value of $1,050 are representedby the following equations:Bd: Price = -0.8 * Quantity + 1160Bs: Price = Quantity + 720Suppose that, as a result of monetary policy actions, theFederal Reserve sells 90 bonds that it holds. Assume thatbond demand and money demand are held constant.a. How does the Federal Reserve policy affect the bondsupply equation?b. Calculate the effect on the equilibrium interest rate in this market, as a result of the FederalReserve action.D) what kind of monetary policy might be helpful to stabilize the economy ( expansionary or contractionary)? E) what specific monetary policy tools does the federal reserve have available to use in this scenario? F) explain in detal, how should the federal reserve use each ofthese tools to maximize their effect in stabilizing the economy, what will be the likely effect of each monetary tool's use on the money supply , and the resulting impact on the economy
- 4. Suppose demand for real money balance is 500 + 0.2Y –1000i. P If P = 10, Y= 1000, and I= 0.10, and the money market is in equilibrium, What is the equilibrium stock of nominal money? b. What is the velocity of money? Suppose there is an autonomous increase in money demand by 100, with a constant nominal money supply, P = 10, and Y= 1000, what is the equilibrium i? d. If the central bank wishes to maintain i = 0.10, what must the nominal money supply be? Draw and label completely a money market equilibrium diagram. Label equilibrium M/P and i with their actual values. Draw and carefully label the changes that result from (c) and (d) above. а. c. е.4. A common rule used for describing the conduct of monetary policy is the Taylor π = r + 0.5 (²-³) + 0.5(π — ñ), where r is the real rate of rule, given by i interest and it is a target rate of inflation. Assume that the real interest rate at full employment to be constant at 2%. Assume also that the same 2% represents target inflation. a. What is the nominal interest rate i when inflation and output are at their equilibrium target level? b. Suppose that the central bank observes a rate of inflation of 4%. With all other variables at the same level. What is the nominal interest rate the central bank would target according to the Taylor rule?5. An economy is facing the recessionary gap shown in the accompanying diagram. To eliminate the gap, should the central bank use expansionary or contractionary monetary policy? How will the interest rate, investment spending, consumer spending, real GDP, and the aggre- gate price level change as monetary policy closes the recessionary gap? LRAS Aggregate price level SRAS E1 P1 AD1 Y1 Yp Potential Real GDP output
- . Trace the impact of a sale of government bonds by the Central bank on bond prices, interest rates, investment, aggregate demand, real GDP, and the price level. The text notes that a 10% increase in the money supply may not increase the price level by 10% in the short run. Explain why. Suppose the Central bank were required to conduct monetary policy so as to hold the unemployment rate below 4%. What implications would this have for the economy?Given that in an economy, Given that in an economy, C = 102+0.7Y, I=150-100r, MS =300, Mt = 0.4Y, and Mz=125-200r where, Y= income, C= consumption, I= investment, MS= money supply, Mt= transactional-precautionary money demand, Mz= speculative money demand and r= interest rate. Calculate;1. The equilibrium level of income and interest rate in this economy.2. The level of C, I, Mt, and Mz when the economy is in equilibrium.3. Suppose the money demand function is: Md/P = 1,000 - 100r where r is real interest rate in percent. Money supply is 1,000 and the price level (P) is 2 What is the equilibrium interest rate? Draw a graph to show Md and Ms, indicate the equilibrium interest rate and real money balance. c. Assumed the price level is fixed. If the Fed wishes to raise the interest rate to 7%, what money supply should it set? Show your answers in the same graph of B). B. D. Base on the new Ms in C), government would like to restore the interest rate back to the original equilibrium level by changing Md, what should be the new price level? Show your answers in the same graph of B).
- 6/An economy is facing the inflationary gap shown in the accompanying diagram. To eliminate the gap, should the central bank use expansionary or contractionary monetary policy? How will the interest rate, investment spending, consumer spending, real GDP, and the aggre- gate price level change as monetary policy closes the inflationary gap? Aggregate price level LRAS SRAS P1 E1 AD1 Potential YP Y output Real GDP6. Assume that the demand for real money balance (M/P) is M/P = 0.6Y– 100i, where Y is national income, and i is the nominal interest rate (in percent). The real interest rate, r, is fixed at 3 percent by the investment and saving functions. The expected inflation rate equals the rate of nominal money growth. a. If Y= 1000, M=300, and the growth rate of nominal money= 1%, what must i and P be? b. If Y=1000, M=300, and the growth rate of nominal money is 2%, what must i and P be?2. Suppose that in the U.S., the income velocity of money (V) is constant. Suppose, too, that every year, real GDP grows by 2.5 percent (%ΔY/year = 0.025) and the supply of money grows by 10 percent (%ΔM/year = 0.10). a. According to the Quantity Theory of Money, what would be the growth rate of nominal GDP = P×Y? Hint: %Δ(X×Y) %ΔX + %ΔY.
