ii) Monetary policy in a liquidity trap. Suppose the money demand is given by: M° = $Y (0.25 - i) as long as the interest rates are positive. The questions below then refer to situations where the interest rate is zero. • If $Y= 80, what is the smallest value of money supply at which the interest rate is zero?

ii) Monetary policy in a liquidity trap. Suppose the money demand is given by: M° = $Y (0.25 - i) as long as the interest rates are positive. The questions below then refer to situations where the interest rate is zero. • If $Y= 80, what is the smallest value of money supply at which the interest rate is zero?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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These are true or false. Need help with both please. The basic quantity equation of money is MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the real output of the economy. (I got false on this one, but I have a feeling that the answer should be true). The data show that the velocity of M1 is unchanging, which is one reason for why there is very little uncertainty as to the effects of monetary policy. (I got true on this one, but I am not 100% sure).
When there is a stable goods market (IS does not shift), what is the best target policy for central bank (interest rate targeting of monetary aggregates targeting)? When there is stable money market (LM does not shift) what is the best strategy of central bank in term of targeting? Explain with reasons
The reserve requirement is 10%, and Leroy deposits his $1,000 check received as agraduation gift in his checking account. The bank does NOT want to hold excessreserves.d) What is the maximum expansion in the money supply possible?e) By how much did the monetary base change?
Suppose the Fed announces that it is raising its target interest rate by 25 basis points, or 0.25 percentage point. To do this, the Fed will use open-market operations to the money by the public. Use the green line (triangle symbol) on the previous graph to illustrate the effects of this policy by placing the new money supply curve (MS) in the correct location. Place the black point (plus symbol) at the new equilibrium interest rate and quantity of money. Suppose the following graph shows the aggregate demand curve for this economy. The Fed's policy of targeting a higher interest rate will the cost of borrowing, causing residential and business investment spending to and the quantity of output demanded to at each price level. Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.
Q1. Suppose that money demand is given by the following function MD=$Y (0.5 - i) and that nominal GDP is given by $200. Moreover, assume that the monetary base is given by H³ = $8. It is also known that people in this economy hold all their wealth either in form of checkable deposits or in form of bonds (i.e. people hold no currency) and that banks must hold 10% of the checkable deposits as reserves. (a) Calculate the money market equilibrium using that the supply and the demand for central bank money is equal. (b) Calculate the overall supply of money. (c) What happens to the money market equilibrium if the central bank decides to increase the monetary base to Hs = $9? (d) What are the effects on the overall money supply in the economy? (Calculate the new overall supply of money and explain your result.)
5. Changes in the money supply The following graph represents the money market in a hypothetical economy. As in the United States, this economy has a central bank called the Fed, but unlike in the United States, the economy is closed (that is, the economy does not interact with other economies in the world). The money market is currently in equilibrium at an interest rate of 6% and a quantity of money equal to $0.4 trillion, as indicated by the grey star. INTEREST RATE (Percent) 8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 0 Money Demand + 0.1 Money Supply 0.2 0.3 0.4 0.5 MONEY (Trillions of dollars) 0.6 0.7 0.8 New MS Curve New Equilibrium ?
Scenario 2 Suppose the money demand is given by MdYx (0.4 - i) = where i is the interest rate. Suppose income Y totals 250. 9. Refer to Scenario 2. If the money supply is M³ = 25, what is the equilibrium interest rate? 10. Refer to Scenario 2. Suppose the Federal Reserve just met and decided they would like to decrease the interest rate by 4 percentage points (compared to the equilibrium rate you found in the previous question). What kind of monetary policy should it use, and what would the money supply have to equal to achieve that goal? (Your answer should be two items: first is expansion or contraction, the second is the actual amount the money supply should be.)
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Economy’s entire money supply is $400,000 and required reserve ratio is 15%. As a result of the Fed's sale of $8,000 worth of government securities to First Main Street Bank, the bank becomes reserve deficient. Suppose that Charles, a First Main Street Bank’s customer re-pays back the $8,000 loan he took out a few months ago. Which of the following most accurately describes First Main Street Bank’s actions? a) the bank creates a $8,000 loan b) the bank keeps the $8,000 as reserves c) the bank creates a $52,000 loan d) the bank keeps the $1,200 as reserves The money supply in the economy is $______.
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1) Why does the Federal Reserve rely on Open Market Operations the most to influence the money supply? ( Max 200 words) 2) Why would the Federal Reserve rarely change the Required Reserve Ratio? ( Max 200 words) 3) How do expansionary actions by the Federal Reserve increase the money supply? ( Max 100 words) 4) How do contractionary actions by the Federal Reserve decrease the money supply? ( Max 100 words) 5) Can monetary policy fix economic shocks? ( Max 200 words)
c) The demand for money is given by: Md 0.5Y - 2000r i. If the income level is Y = 1000, and the interest rate is r= 10%, what is the demand for money? ii. What is the equilibrium level of interest rates when the supply of money is equal to 200? iii. What happens to the equilibrium rate of interest when increase in the money supply to 400?