17. Use the following information to answer the next four questions. Each multip

Question

17.

Use the following information to answer the next four questions. Each multiple choice question is worth 3 points.

mm = money multiplier = .8
MB = monetary base = 4000
Money Demand: Md = P X [ a0 + .5 (Y) - 200 (i) ]
where: a0 = 1200, Y = 6000

For simplicity we hold the price level fixed at 1 and assume that inflationary expectations are fixed at 2%. Y is also held constant in this problem.

What is the equilibrium interest rate (i)?

  A) .20%
  B) 1%
  C) 5%
  D) 8%
  E) None of the above are correct

18.

Suppose a0 falls to 800. What is the new equilibrium interest rate?

  A) .33%
  B) 3%
  C) 4%
  D) 6%
  E) None of the above are correct

19.

Suppose that the Fed wanted to keep interest rates constant at their initial level (the value you found in #1). What would the Fed have to do in terms of open market operations to achieve this?

  A) 500 in open market sales
  B) 500 in open market purchases
  C) 400 in open market sales
  D) 400 in open market purchases
  E) 2800 in open market sales

Use the following information to answer the next four questions. Each multiple choice question is worth 3 points. mm = money multiplier = .8 MB = monetary base = 4000 Money Demand: Md = P X [ a0 + .5 (Y) - 200 (i) ] where: a0 = 1200, Y = 6000 For simplicity we hold the price level fixed at 1 and assume that inflationary expectations are fixed at 2%. Y is also held constant in this problem. What is the equilibrium interest rate (i)? 20% 1% 5% 8% None of the above are correct Suppose a0 falls to 800. What is the new equilibrium interest rate? 33% 3% 4% 6% None of the above are correct Suppose that the Fed wanted to keep interest rates constant at their initial level (the value you found in #1). What would the Fed have to do in terms of open market operations to achieve this? 500 in open market sales 500 in open market purchases 400 in open market sales 400 in open market purchases 2800 in open market sales

Explanation / Answer

17. C) 5%

18. B) 3%

19. D) 400 in open market purchases

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