Question

The interest rate (0 Hd Monetary Base (H) There is negative relationship between the interest rate and the demand for the Fed money. And an increase in $Y shifts the demand for the Fed money curve to the right. Question 1: Suppose an economy without banks. In this economy the equilibrium in money market is given as follows: M = M = 0.25$Y - 0.20i, where $Y=$10 trillion and the interest rate is positive. a) If the Fed sets the interest rate at 2.5%, what is the money supply the Fed create? Graph your answer. b) Suppose that the Fed wants to cut the interest rate to 2.0%. What is the new level of money supply the Fed must set? Question 2: Suppose an economy with banks. Suppose that the proportion of currency (c) is 0.2 and the required reserve ratio (0) is 0.1. The demand for money is given as follows: M = 0.40$Y-0.41, where $Y is $100 billion and the interest rate is positive. a) Write down an equation for the demand for the Fed money? b) Suppose that the monetary base (H) is $10 billion. What is the equilibrium interest rate? Graph your answer. c) What will be the equilibrium interest rate when the Fed increases the monetary base to $11 billion? Show your answer on the same graph.

Answer 1

Page No. Givenë m'=md_ 0.2587-0.201; you to trillion Fed sets interest rate, i = 2.5% = 0.025 money supply mr = 0.25 (10) - 0. 2010.025) = 2.5-0.005 - Im= 2.495 trillion / he graph will be a vertical line interest H ams tate fi 2.5%F- 7 м. 2.445 67 of interest rate; i = 2.0% = 0.02 m = 0.25 (1)-0.20 i m = 0.25(10)-(0-20) 10.02) ma = 2-5 - 0-004 me = $2.496 trillion