Q#1

Who determines the nation's money supply? Explain how the money supply could be expanded or reduced in an economy in which all money is in the form of currency.

Q#2. What happens to M1 and M2 due to each of the following changes?

(a) You take $500 out of your checking account and put it into a passbook savings account.

(b) You take $1000 out of your checking account and buy traveler's checks.

(c) You take $1500 out of your money-market mutual fund and deposit into your checking account.

(d) You cash in $2000 in savings bonds and invest the money in a certificate of deposit.

Q# 3 Suppose the central bank's short-run response to any change in the economy is to change the

money supply to maintain the existing real interest rate. What would happen to money supply if

there were a reduction in government purchases? Given the Fed's policy, what would happen in the

very short run (before general equilibrium is restored) to output and the real interest rate? What must

happen to the LM curve and the price level to restore general equilibrium?

Q#4Explain Demand for money and Determinants of the Demand for money?

Q#5 Money demand in an economy in which no interest is paid on money is

Md/p = 500 + 0.2Y - 1000i.

a.Suppose that P = 100, Y = 1000, and i = 0.10.

Find real money demand, nominal money demand, and velocity.

b. The price level doubles from P = 100 to P = 200. Find real money demand, nominal money demand, and velocity

Q#6

Suppose the money demand function is given byMd/P = 640 + 0.1Y - 5000 (r + ).

Suppose the central bank changes the nominal money supply depending on income and inflation:

Ms = 1000 + 0.1Y - 4000i.

(a) If expected inflation equals actual inflation = 0.03, Y = 1000, and r = 0.02, calculate the price level.

(b) If inflation rises to 0.04 while the other variables remain as in part a, calculate the price level.

(c) If expected inflation rises to 0.04 while the other variables remain as in part a, calculate the price level.

(d) If the real interest rate rises to 0.03 while the other variables remain as in part a, calculate the

price level.