Question

4. If nominal money demand doubles and the real money supply also does what happens to the price level ( ). The price level increases by a factor of four b. The price level doubles ). The price level is unchanged. d. The price level falls by one-half. IL Short-Answer O stiens (19 points) 5. (7 points) If the Federal Reserve sold government securities, then the money supply (increase decrease remain the same), the money he would _(increase decrease remain the same), the money multiplier would (increase decrease remain the same, and the amount of currency would (increase decrease remain the same and the of deposits would (increase decrease remain the samel. Such action will shift the money supply curve to the right and use the interest rate to (inctcase decrease 6. points) Suppose total reserve is 100, money supply is 1200, and currency is fifth of deposit. Then currency equals deposit is money multiplier is and reserveris 7.8 points) Consider the following conomy ) 1-SY. 2004 Y-4500 Real money demand Full-employment output Expected inflation Nominal money supply Price level M-9000 A. When the awet market is in equilibrium, the real interesate is The equilibrium seal supply of money is B. Now suppose output increases to 4640. The equilibrium nominal interest rate in the asset market is The equilibrium sal demand for money is C. Use the cosy market squilibrium diagram to demonstrate the effects market when real output increases. How will this affect the equilibriumitest matet (4 points)

Answer 1

(4) (c)

Nominal money supply = Real money supply x Price level, therefore

% Change in Nominal money supply = % Change in Nominal money supply + % Change in Price level

100% = 100% + % Change in Price level

% Change in Price level = 0

(5)

If Fed sells government securities, money supply would increase, the money base would increase, the money multiplier would remain the same and amount of currency would remain the same and amount of deposits would increase. Such action would shift money supply curve to the right, and cause the interest rate to decrease.

(6)

Money supply (MS) = Currency (C) + Deposits (D)

1200 = D + (D/5)

1200 = 6D/5

Deposit (D) = (1200 x 5)/6 = 1000

Currency (C) = 1000/5 = 200

Currency-deposit ratio (cr) = C/D = 200/1000 = 0.5

Reserve-deposit ratio (rr) = R/D = 100/1000 = 0.1

Money multiplier = (1 + cr) / (cr + rr) = (1 + 0.5) / (0.5 + 0.1) = 1.5 / 0.6 = 2.5

Reserve ratio = 0.1

NOTE: As HOMEWORKLIB Answering Policy, 1st 3 questions are answered.