2. Suppose money demand function is given by M-500*(0.25-r), r is real interest rate, money supply...

 

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2. Suppose money demand function is given by M-500*(0.25-r), r is real interest rate, money supply M' is 100 (billion dollars) and the required reserve ratio is 20%. a) Calculate equilibrium interest rate (4 marks) b) If the target real interest rate of the central bank is 15%, at what level should it set money supply? (4 marks) c) Calculate the money multiplier. (3 marks) d) Suppose there is no currency in this economy. To achieve the target real interest rate of 15% as stated in part b), should the central bank buy or sell bonds in bonds market? How much should it buy or sell? (6 marks) 2. Suppose money demand function is given by M-500*(0.25-r), r is real interest rate, money supply M' is 100 (billion dollars) and the required reserve ratio is 20%. a) Calculate equilibrium interest rate (4 marks) b) If the target real interest rate of the central bank is 15%, at what level should it set money supply? (4 marks) c) Calculate the money multiplier. (3 marks) d) Suppose there is no currency in this economy. To achieve the target real interest rate of 15% as stated in part b), should the central bank buy or sell bonds in bonds market? How much should it buy or sell? (6 marks)

Answer rating: 100% (QA)

a The money demand function is M d 500025 r The money supply function is M s 100 At equilibrium M d ... View the full answer