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- Suppose that the economy has the following money supply and demand equations: Money Supply: M = 8000Money Demand: M= 10,000 – 40,000rwhere money is in billions of dollars and interest rates, r , is written as a decimal(e.g., an interest rate of 10% would be written as .1 in the equation).A. Determine the equilibrium interest rate and quantity of money.B. What will happen in the money market if the interest rate is currently 10%?What is the amount of excess supply of or excess demand for money?C. Show in graph that at this interest rate (10%) there is disequilibrium in themoney market.2. Assume that a particular bank has excess reserves of Php800,000 and checkabledeposits of Php1,500,000. If the reserve ratio is 20%, what is the size of the bank’sactual reserves?3. Suppose that GRAB Bank is a newly created bank in your hometown. Consider thefollowing transactions: Owners of the bank sold shares of stocks to the public (which includes owners’equity) amounting to P1,000,000. To fully…The diagram on the right shows the demand for money curve in a hypothetical economy. Suppose that the economy is initially at point E. Suppose that due to changes in expectations in the financial markets, the quantity of money demanded increases because of speculative reasons. This change would be associated with a movement from E to point EB C Interest Rate % EB Eo EA Quantity of Money MD (Y,P)The government decides that the use of credit cards is bad, and introduces a tax on creditcard balances. That is, if a consumer or firm holds a credit card balance of X (in real terms), heor she is taxed tX, where t is the tax rate. Determine the effects on the equilibrium price andquantity of credit card balances, the demand for money, and the price level, and explain yourresults.
- 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?The diagrams below illustrate two alternative approaches to implementing monetary policy. The economy begins in monetary equilibrium with the interest rate equal to 2% and the money supply equal to Mº Interest Rate 3% 2% MI MO MD(P.Y) Quantity of Money part (1)-targeting the interest rate Interest Rate 2% FIGURE 28-1 MI MO MDP.Y) Quantity of Money part -targeting the money supply Refer to Figure 28-1. If the Bank of Canada raises the target interest rate to 3%, as shown in part (i), then it must accommodate the resulting___ in quantity of money demanded by in financial markets. Oa) decrease; selling government securities Ob) decrease; buying government securities Oc) increase; selling government securities d) increase; buying government securitiesAssume the following money demand function: Md = PY (0.35 - ) The income is € 100. Suppose further that the bid offer is € 20. There is equilibrium in the money market and the financial markets. a. What is the interest rate? b. If the central bank wants to increase the interest rate i by 10 percentage points (for example from 2% to 12%), how should it choose the money supply?
- Explain in detail the process of Monetary Policy transmission of a decrease in the cashinterest rate. Use relevant graphs to describe how a Central Bank’s action on the interest cashrate ripple through the economy and lead to the target policy goal. (Three connected diagramsshould be used: (1) money supply and demand (2) investment demand schedule (3) AS/ADdiagram. Interest rates is the variable that connects the first and second diagram).“The costs of financing investment are related only tointerest rates; therefore, the only way that monetarypolicy can affect investment spending is through itseffects on interest rates.” Is this statement true, false, oruncertain? Explain your answer.In an economy where the central bank implements negative interest rates as a monetary policy tool, what is the most likely short-term impact on consumer savings behavior and bank profitability? A. An increase in consumer savings as people seek to safeguard their money and a rise in bank profitability due to increased lending. B. A decrease in consumer savings as the incentive to save diminishes and a decrease in bank profitability due to lower interest margins. C. No significant change in consumer savings behavior but an improvement in bank profitability due to lower borrowing costs. D. A shift in consumer investment towards riskier assets and challenges in bank profitability due to compressed interest margins. Please don't use chatgpt it is giving wrong answer and please provide valuable answer
- Which of the following statements is not consistent with Liquidity Preference Theory? All else equal, an increase in nominal output will increase money demand All else equal, an increase in nominal output will decrease the nominal interest rate O All else equal, an increase in the money supply will decrease the nominal interest rate Money supply is exogenously determined by the Federal ReserveAccording to the portfolio theories of money demand, whatare the four factors that determine money demand? Whatchanges in these factors can increase the demand for money?Suppose that the Federal Reserve conducts an open market sale. This is considered monetary policy. In response, the size of the monetary base and the size of the money supply O contractionary; grows; grows by more expansionary: grows; grows by more contractionary; shrinks; shrinks by less O contractionary; shrinks; shrinks by more O expansionary; grows; grows by less
