Suppose the money supply is $250 million dollars and the demand for money is given by Qm ^D = 400 - 40i, where Qm ^D is in millions of dollars.

A. What is the equilibrium interest rate in this economy?

B. If the Fed announced a target for the overnight rate of 5%, should they buy or sell bonds to achieve this goal?

C. Assuming that the desired reserve ratio is 25%, banks do not hold excess reserves, and there is no currency drain, what amount of bonds should they buy/sell in order to achieve their goal?

Answer rating: 100% (QA)

A In equilibrium Demand for money Supply of money 400 40i 250 40i 150 i 375 B Target ove... View the full answer