1.Draw a diagram to illustrate the relationship between the demand for real money balances (L), GDP (Y) and the interest rate (i), L = kY hi, when real GDP has a given value Y0.

2.Explain your choice of the intersection of your demand for money function with the horizontal axis, and your choice of the slope of the function.

3. Using your diagram, illustrate and explain the quantity of real money balances demanded for a specific interest rate, say i0. Pay particular attention to the underlying motives for holding these money balances.

4.Suppose interest rates declined from your initial assumption of i0 to a new lower rate i1. Illustrate and explain the effect of the change in interest rates on the demand for money balances.

5.Holding interest rates constant at either i0 or i1, suppose real GDP were to increase. Illustrate and explain the effect of the increase in real GDP on the demand function and the quantity of real money balances people hold.

6.Today it costs $1.25Cdn to buy $1US. Suppose tomorrow US interest rates rise. What would happen to the foreign exchange rate between Canadian and US dollars? Explain why.

7. (a) Draw a diagram to illustrate equilibrium in the money market. (b) Starting from your initial equilibrium, suppose real national income (Y) increased. Illustrate and explain how the money market would adjust to this change in economic conditions. (c) How does the interest rate in the new equilibrium compare with the interest rate in the initial equilibrium?

8.Construct a set of diagrams that shows the monetary transmission mechanism linking interest rates to aggregate demand and output. Using these diagrams, show and explain: 9. How a reduction in the money supply would affect aggregate demand and output.

10. Alternatively, how an increase in the precautionary demand for money balances caused by terrorist activity, or severe weather events, or an increase in uncertainty in general would affect aggregate demand and output. Assume the money supply is held constant.

11.Alternatively, how would an increase in autonomous investment expenditure and exports affect aggregate demand, output, and interest rates?r