Macroeconomics (7th edition) by Olivier Blanchard
Monetary policy in a liquidity trap
Suppose that money demand is given by Md = $Y(0.25 - i) as long as interest rates are positive. The questions below then refer to situations where the interest rate is zero.
a. What is the demand for money when interest rates are zero and $Y = 80?
b. If $Y = 80, what is the smallest value of the money supply at which the interest rate is zero?
c. Once the interest rate is zero, can the central bank continue to increase the money supply?
d. The United States experienced a long period of zero interest rates afer 2009. Can you find evidence in the text that the money supply continued to increase over this period?
e. Go to the database at the Federal Reserve Bank of St. Louis known as FRED. Find the series BOGMBASE (the monetary base) and look at its behavior from 2010 to 2015. What happened to the monetary base? What happened to the federal funds rate in the same period?