QUESTION ONE

Given the following information:

Money Supply Function (Ms) = 3000

Money Demand Function (Md) = 600 + 0.6Y - 300r

where Y and r represent the levels of income and interest rate, respectively. Based on the above information

i) Derive the money demand function if the income level (Y) is RM5000.

ii) Find the equilibrium levels of quantity of money and interest rate.

iii) Find the new level of equilibrium quantity of money and interest rate if the autonomous money demand increased by 20 percent.

iv) Show your answers to parts (c)(ii) and c(iii) in an appropriate diagram.

QUESTION TWO

a) Consider an economy with the following features:

C = 200 + 0.4Y_d

Income tax, T =300

I = 200 - 50r

Government expenditure, G = 500

Transaction demand for money. Mdt = 40 + 0.6Y

Speculation demand for money, Mds = -0.7r

Nominal money supply = 700

Price level, P = 1

where Y_d stands for disposable income, and r for rate of interest.

i) Derive the IS and LM equations

ii) Calculate the equilibrium levels of income and rate of interest

b) "Expansionary fiscal policy is more effective in influencing the aggregate income level when investment is interest-elastic". Do you agree with this statement? Why and why not? Explain your answer based on IS-LM framework

c) Based on an appropriate example, explain THREE (3) functions of money

d) Suppose that the Central Bank decided to increase percent of Reserve Requirement Ratio (RRR) from 10% to 15% to solve inflation problem. With the aid of money market diagram, explain the impact of an increase in RRR to the money market equilibrium.