1) The initial conditions in the money market are as follows:
rr = .10
C = 400
D = 1200
ER = 10
Md = 1200 + .5Y - 100i
Where Y is given and equal to 2000. We assume the price level equals 1 so that nominal money demand and money supply is the same as real money demand and real money supply.
a) Calculate the monetary base, the money multiplier, and the money supply by using m x MB
b) Find the interest rate that clears the money market.
Draw a money demand money supply diagram that depicts these initial conditions as point A. A completely labeled diagram is worth 10 points.
Suppose that conditions in the money market change and that the 'new' money demand function is now:
Md = 1300 + .5Y - 100i
this is the only change
c) Name three reasons that money demand would change like this.
d) Solve for the new equilibrium interest rate that clears the money market and label on your diagram as point B.
e) Explain the intuition as to why the interest rate changed the way it did.
f) What type and how many open market operations must the Fed conduct to keep interest rates at the initial level as at point A (round to the nearest integer)? Label this new point as point C.
