Monetary Policy and Asset Demand

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Assignment #3
Principles of Microeconomics
Spring, 2011
Due Date: March 16th, 2011

Lecturer: juwang
Answer All Questions

1.The following questions refer to graphs A and B below. In the graphs, Qf represents full-employment output and Qu1 and Qu2 represent less-than-full-employment levels of output. ( 3 Marks)

(a)Which of the two graphs best illustrates the Keynesian view of the macroeconomy, and which best illustrates the classical view? Explain.
(b)When demand shifts from AD1 to AD2, explain what happens to output and price level in graph A.
(c)When demand shifts from AD1 to AD2, explain what happens to output and price level in graph B.

2.Use the figures in the table below to answer the following questions. ( 3 Marks)

$ Billions
Small time deposits1,250
Large time deposits1,300
Saving deposits, including
money-market deposit accounts1,620
Money-market mutual funds905
Checkable deposits836

(a)What is the value of M1?
(b)What is the value of M2?
(c)What is the value of M3?

3.The total demand for money is equal to the transactions demand plus the asset demand for money. ( 5 Marks)

(a)Assume that each dollar held for transactions purposes is spent on the average five times per year to buy final goods and services. If the nominal GDP is $10,000 billion ($10 trillion), what is the transaction demand?

(b)The table below shows the asset demand at certain rates of interest. Using your answer to part (a), complete the table to show the total demand for money at various rates of interest.

Interest rateAsset demandTotal demand
     (in %)     (billions)    (billions)    
10$ 30$_____

(c)If the money supply is $2,060 billion, what will be the equilibrium rate of interest?
(d)If the money supply rises, will the equilibrium rate of interest rise or fall?...
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