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Suppose that in the economy currency in circulation is $100, amount of bank reserves is $50, the reserve ratio is 10%, the interest sensitivity of the demand for money is 20, and the income sensitivity of the demand for money is 0.5. The price level is 1 and stays unchanged. Aggregate output is $1480. (a) Explain the difference between the transaction motive for holding money and the speculative motive for holding money (b) For this economy define: the value of the monetary base; the value of the money multiplier; the value of the money supply (give the two ways of calculations); (ii) the function of the demand for money; (iii) the level of the equilibrium interest rate. Show the equilibrium on the money market graph in the (interest rate i- quantity of money M) space, putting all the figures from your calculations, including the slopes of the curves. (c) Suppose output increases to $1520. What will be the new level of the equilibrium interest rate? Show this change on your graph from point (b), putting new figures. Give the explanations of this change via the change in the bonds market and show it on the bonds market graph. (d) Suppose that in the initial situation (when output is $1480) the central bank buys government bonds in the open market worth $10. What will be now the equilibrium level of the interest rate? [For simplicity sake, assume here that aggregate expenditures are interest insensitive; it means output does not change and thus there is no change in the transaction demand for money]. Redraw the graph from point (b) and show the change, putting new figures. Give the explanations of this new change via the change in the bonds market and show it on the bonds market graph.

Suppose that in the economy currency in circulation is $100, amount of bank reserves is $50, the reserve ratio is 10%, the interest sensitivity of the demand for money is 20, and the income sensitivity of the demand for money is 0.5. The price level is 1 and stays unchanged. Aggregate output is $1480. (a) Explain the difference between the transaction motive for holding money and the speculative motive for holding money (b) For this economy define: the value of the monetary base; the value of the money multiplier; the value of the money supply (give the two ways of calculations); (ii) the function of the demand for money; (iii) the level of the equilibrium interest rate. Show the equilibrium on the money market graph in the (interest rate i- quantity of money M) space, putting all the figures from your calculations, including the slopes of the curves. (c) Suppose output increases to $1520. What will be the new level of the equilibrium interest rate? Show this change on your graph from point (b), putting new figures. Give the explanations of this change via the change in the bonds market and show it on the bonds market graph. (d) Suppose that in the initial situation (when output is $1480) the central bank buys government bonds in the open market worth $10. What will be now the equilibrium level of the interest rate? [For simplicity sake, assume here that aggregate expenditures are interest insensitive; it means output does not change and thus there is no change in the transaction demand for money]. Redraw the graph from point (b) and show the change, putting new figures. Give the explanations of this new change via the change in the bonds market and show it on the bonds market graph.

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Suppose that in the economy currency in circulation is S100, amount of bank reserves is $50, the reserve ratio is 10%, the interest sensitivity of the demand for money is 20, and the income sensitivity of the demand for money is 0.5. The price level is1 and stays unchanged. Aggregate output is $1480. (a) Explain the difference between the transaction motive for holding money and the speculative motive for holding money (b) For this economy define: o the value of the monetary base; the value of the money multiplier; the value of the money supply (give the two ways of calculations); (n) the function of the demand for money (ii) the level of the equilibrium interest rate. Show the equilibrium on the money market graph in the (interest rate quantity of money M) space, putting all the figures from your calculations, including the slopes of the curves. (c) Suppose output increases to $1520. What will be the new level of the equilibrium interest rate? Show this change on your graph from point (b), putting new figures. Give the explanations of this change via the change in the bonds market and show it on the bonds market graph (d) Suppose that in the initial situation (when output is $1480) the central bank buys government bonds in the open market worth S10. What will be now the equilibrium level of the interest rate? [For simplicity sake, assume here that aggregate expenditures are interest insensitive; it means output does not change and thus there is no change in the transaction demand for money]. Redraw the graph from point (b) and show the change, putting new figures. Give the explanations of this new change via the change in the bonds market and show it on the bonds market graph. Interest rate should be negative
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