Interest rate 10% 10% 9 8 Money supply 9 Interest rate Money supply 8 7 7 6 6 5 5 Money demand 4 4 Money demand (1) 3 2 1 Money demand 1 2 3 4 5 6 7 8 9 10 Money (in billions) 2 1 Money demand (1) 0 123 4 5 6 7 8 9 10 Money (in billions) Answer Bank decrease in the price level increase in output decrease in output increase in the price level

6. Monetary policy in the long run Consider a hypothetical economy that produces at its long-run macroeconomic equilibrium at a price level of 100. Suppose that the central bank in this economy is expanding the money supply by 4% each year. In order for the price level to be maintained at 100, real GDP must grow at an annual rate of (percentage?) if the velocity of money remains constant. Suppose the central bank enacts an unanticipated restrictive monetary policy. As a result, the supply of loanable funds (decreases/ Increase) , leading to a (rise/fall) in short-term interest rates. This in turn (reduces/raises) the opportunity cost of holding money. As people hold (Lower/ higher) money balances, the (velocity of money/ Price level/ aggregate output) will (rise/fall). True or false?: The shift in monetary policy exerts an impact on output and the general level of prices with a time lag.   6. Monetary policy in the long run Consider a hypothetical economy that produces at its…

2

Interest rate 2% 4 6 8 C) 6 percent. D) 8 percent. 10 Transaction demand for money $220 220 220 220 220 Asset demand for money $300 280 260 240 220 1. Refer to the above table. The equilibrium interest rate is: B) 4 percent. Money supply $460 460 460 460 460 A) 2 percent.

I only need Help with part (B)

The following table gives the quantity of money demanded at various price levels (P), the money demand schedule. In the following table, fill in the column labeled Value of Money. Price Level (P) Value of Money (1/P) 0.80 1.00 1.33 2.00 Now consider the relationship between the quantity of money that people demand and the price level. The lower the price level, the required to complete transactions, and the money people will want to hold in the form of currency or demand deposits. Assume that the Federal Reserve initially fixes the quantity of money supplied at $3.5 billion. VALUE OF MONEY 8 Use the orange line (square symbol) to plot the initial money supply (MS) set by the Fed. Then, referring to the previous table, use the blue connected points (circle symbol) to graph the money demand curve. 2.00 1.75 1.50 1.25 1.00 0.75 Quantity of Money Demanded (Billions of dollars) 1.5 2.0 3.5 0.50 025 0 7.0 3 QUANTITY OF MONEY (Billions of dollars) 7 101 MS, Money Demand M money ?

A bank that expects interest rates to increase in the future will wants to hold more rate sensitive asset and fewer rate sensitive liabilities. (Choose the correct option) 1. Disagree. Rate sensitivve assets will increase the revenue this holding more of them as assets while reducing them as liabilities will decrease bank profits 2. Disagree. In any case it is more profitable for banks to reduce the number of rate sensitive assets and liabilities and increase assets and liabilities with fixed interest  3. Agree. Rate sensitive assets will increase the revenue thus holding more of them as assets while reducing them as liabilities will increase bank profits  4. Agree. Rate sensitive assets will increase in value thus holding more of them as assets, while reducing them as liabilities will decrease interest rate risk

Value of Money 2 1 I MS1 1 19 U MS2 D Money Demand Quantity of Money money supply is MS1 and the value of money is 1, then there is a shortage in Select one: a. supply of money that is represented by the distance between points A and C. b. demand for money that is represented by the distance between points C and D. c. supply of money that is represented by the distance between points C and D. d. demand for money that is represented by the distance between points A and C. Refer to figure. If the

15

2. Money supply, money demand, and adjustment to monetary equilibrium The following table shows a money demand schedule, which is the quantity of money demanded at various price levels (P). Fill in the Value of Money column in the following table. Quantity of Money Demanded Price Level (P) Value of Money (1/P) (Billions of dollars) 1.00 2.0 1.33 2.5 4.0 2.00 4.00 8.0 Now consider the relationship between the price level and the quantity of money that people demand. The lower the price level, the Y money the typical transaction requires, and the y money people will wish to hold in the form currency or demand deposits.