1. Explain what will happen to holdings of bonds and money if there is an excess supply of money in the economy. What will happen if there is an excess demand for money in the economy? What will happen to interest rates in each of these cases?
2. The island nation of Macadamia recently experienced an 800 percent jump in tourism, increasing income throughout the island. Suppose the Macadamia money market was in equilibrium prior to the rise in tourism. What impact will the increase in income have on the equilibrium interest rate in Macadamia, assuming no change in the supply of money? What will the Macadamia Central Bank have to do to keep the increase in income from impacting the interest rate?