Question

3. Returning to Hippoland, the CBHIP, is following an interest rate policy target of 3%. (This question is drawn from the first part of Chapter 15 which you have been working on and will be discussed in class on Monday. Be sure to careful to label all curves and equilibrium points and shifts in your graph.)
4. 1. Draw a graph of the demand and supply for GDUBs, Hippoland’s currency with the interest rate on the vertical axis and GDUBs on the horizontal axis. Assume the money supply is 100 billion GDUBs. Draw the demand curve for GDUBs when the money supply is in equilibrium.
   2. Suppose that Hippoland consumers are confident about the future and increase consumption expenditure. What happens to the demand for GDUBs? Assume the money supply remains at 100 billion GDUBs.
   3. Given your answer in b. what would be the equilibrium interest rate? (An exact number is not required.) Is this consistent with CBHIP’s policy target? What will the CBHIP have to do, if the policy target stays the same? Illustrate in your graph.

Answer 1

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