Homework 4 ECN 202 - Principles of Macroeconomics Due Wednesday, December 8 1. Suppose the demand for money rises. a. All else equal, will this lead to recession or boom, and why? Trace the causal process as explicitly as possible. (10 points) b. In order to counteract (a), should the central bank expand or contract the money supply? (10 points) C. In order to do (b), should the central bank do open market purchases or sales, and what will this typically be a purchase or sale of? (10 points) d. When the central bank does (c), does this imply a rise or a fall in the Federal Funds Rate, and why? (10 points) C. Explain how this affects interest rates in the broader economy, step by step, based on the portfolio balance effect. (20 points) f. Suppose Congress also wants to counteract (a) with fiscal policy. If you can't convince them not to do it, how would you recommend they fund the spending, and why? (20 points) 2. The spot exchange rate between the Gondorian castar (the home country) and the Mordorian dinar is 1/3. a. The price of mithril is 3,000 castar per square foot. What is its price in dinar? (10 points) b. If the castar depreciates against the dinar and the price in castar stays the same, does the price of mithril in dinar rise or fall, and why? (10 points)