Question

1. 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 = 3000

Money Demand: Md = P X [ a0 + .5 (Y) – 200 (i) ]

where: a0 = 1000, Y = 3600

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)?

2%

2.5%

None of the above are correct

3%

1%

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

2.5%

None of the above are correct

2%

3%

1%

3. 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?

2200 in open market sales

250 in open market sales

200 in open market purchases

200 in open market sales

250 in open market purchases

4. Given the interest rate you found in #18, what is the ex-ante real interest rate?

2%

None of the above are correct

1%

0%

-1%

 

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