11. Graphically derive the LM curve from the money market equilibrium when the money supply is exogenously determined by the central bank and remain constant. That is, drive the positive relation between the interest rate and income. 12. Derive LM relation and graphically show it under the alternative assumption that the central bank sets a target interest rate (and adjusts the money supply so as to achieve it). In this case, LM relation would represent the combination of interest rate and output arising from an interest rate rule.
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- Assume that the consumption function is giv Assume that the consumption function is given by C = 200 + 0.5(Y – T) and the investment function is I = 1,000 – 200r, where r is measured in percent, G equals 300, and T equals 200. Assume that the equilibrium in the money market may be described as M/P = 0.5Y – 100r, and M/P equals 800.What is the numerical formula for the IS curve?What is the slope of the IS curve? What is the numerical formula for the LM curve? Calculate the equilibrium r and Y. Calculate the government spending multiplier. en by C = 200 + 0.5(Y – T) and the investmentfunction is I = 1,000 – 200r, where r is measured in percent, G equals 300, and T equals 200. Assume that the equilibrium in the money market may be described as M/P = 0.5Y – 100r, and M/P equals 800.What is the numerical formula for the IS curve?What is the slope of the IS curve? What is the numerical formula for the LM curve? Calculate the equilibrium r and Y. Calculate the government spending…Q2-20 Other things equal, if the demand for money becomes more elastic, then the LM curve will become _______.In other words, a given rise in the interest rate will, in order for money market equilibrium to be preserved, be associated with a ________ rise in income. Select one: a. less elastic / smaller b. less elastic / larger c. more elastic / smaller d. more elastic / largerWhat are the three motives for the demand for money in the Theory of Liquidity Preference? List them and give a brief description of each. Now, combine the three motives into a single equation for the demand for money, using the linear equation we focused on in this class. State the equation and explain in words each of the components of the equation. Lastly, is this equation “stable”, meaning in this context that the money function, once drawn, seldom changes? If so, is monetary policy to keep interest rates near a chosen target easy or hard. If not, if money demand is unstable, what does that mean for the ability of the Fed to stabilize interest rates near a chosen target?
- What is the basic determinant of ( a ) the transactions demand and (b) the asset demand for money? Explain how these two demands can be combined graphically to determine total money demand. How is the equilibrium interest rate in the money market determined? Use a graph to show the impact of an increase in the total demand for money on the equilibrium interest rate (no change in money supply). Use your general knowledge of equilibrium prices to explain why the previous interest rate is no longer sustainable.Suppose that the Money Supply is currently at $13,000, and that Money Demand is given by: MD= 23,000 - 2,000r where r is the interest rate, and for the purposes of the functional form above, if the interest rate = 8%, the r = 8 for derterming MD. Suppose that we start in equilibrium in the money market and the Central Bank targets the interest rate. If the Central Bank raises the interest rate by 2%, then how large will the surplus in the Money Market be if the Central Bank does not adjust the Money Supply (MS)? Note: round your answer to two decimal places. Also, if the answer is $2,678 for example, input this as 2678.001. Suppose the LM curve is given by (M/P) = d,Y – d̟i . The slope of the LM curve is . If d, is small, i.e. if money demand is. very sensitive) to the level of income, then an increase in income will cause a _(sensitive /not _(small /large) increase in money demand and only a _ (small /large) increase in the interest rate is necessary to restore equilibrium in the money market: the LM curve is relatively _(flat /steep). Similarly, if d, is small, i.e. if the quantity of money demanded is (sensitive /not very sensitive) to the interest rate, then an increase in income will increase money demand and it requires a (small /large) increase in the interest rate to restore equilibrium in the money market: the LM curve is relatively _(flat /steep). 2. For this question, assume that Y = N. Based on our understanding of the labor market model presented in Chapter 6, we know that a reduction in the markup will cause an/a _ (increase, reduction) in the natural level of output. 3. If u ? =? )
- Refer to Figure 11.2. Suppose that the Quantity of money demanded is currently at Point B. A movement to Point D could be caused byA) an increase in income, ceteris paribusB) a decrease in the interest rate, ceteris paribusC) a decrease in the price level, ceteris paribusD) an increase in the price level, ceteris paribusDerive two LM curves, the first when money demand is very sensitive to the interestrate, and the second where money demand is insensitive to the rate of interest. Show howthe slopes of the LM curves differIn class we assumed that money demand depends upon income, Md = L(Y, i). However, if people hold money as a medium of exchange it may be that money demand really should depend upon consumption, Md = L(C, i). In other words, if people consume more, they will also want to hold more money. Suppose that consumption, as usual, depends upon disposable income, C = C(Y – T). Money demand will then also, indirectly, depend upon disposable income, Md = L[C(y - T), i]. True or False: In this case, a tax cut will always increase in the short run
- Money demand curve is downward sloping because as interest rate rises, businesses find it less attractive to borrow for the sake of investment. as interest rate rises, liquidity provided by holding money looses itsattractiveness for households, compared to other financial instruments as means of saving. as interest rate rises, it becomes less attractive for households to hold other financial instruments as means of saving as interest rate rises, households will need less money for their daily transactions.Exercise 1 cr+1 Consider the money supply Ms=mxB , m = cr+rr Assume that the demand for real money is given by the equation (M/P)d=0.25Y, and that the output has been growing 3% per year. Assume, further, that you have been called before Congress to testify about the long-run effects of increasing the growth of the money supply to 10 % per year. 1. State, compute and explain the long-run effects of this change on the inflation rate, on the nominal interest rate, on the real interest rate, on investment and on the real GDP. For each of them, argue both using the formulae that we studied and the macroeconomic dynamic beyond the effect. 2. Compute the implied money velocity. Suppose that the actual nominal value of the output (PY) is 1000, the value of the reserves is 50 and the toal value of the deposits is 75. Find the actual money multiplier. 3. State the different ways in which the central bank can achieve the change (+10%) in the money supply (think about the variables that can…In the context of the money market and the LM curve, which of the following is true? O The LM is steep when the sensitivity of money demand to changes in income is large Points left and above a given LM reflect excess demand for money OA decrease in the money supply shifts the LM curve down to the right The slope of the LM is determined by the sensitivity of investment to changes in interest rates