Short Questions

1.Explain what types of policies a central bank can implement to reduce the interest rate.

2.Use the market for central bank money to answer this question. Graphically illustrate and explain what effect an increase in the reserve deposit ratio (?) will have on this market and on the equilibrium interest rate.

3.The demand for money is given by Md = $Y(0.28 ? i), where $Y = $120 and the supply of money is $30.

(a) What is the equilibrium interest rate?

(b) If the central bank wants to decrease i by 2%, at what level should it set the supply of money?

4.Define the LM curve. Second, explain why it has its particular shape.

When the central bank pursues contractionary monetary policy, we that this policy will result in an increase in the interest rate, a reduction in investment, a reduction in demand, and a lower level of equilibrium output. Explain what happens to the position of the IS curve as the central bank pursues contractionary monetary policy.

5.

3. The response of the economy to fiscal policy a. Use an IS-LM diagram, show the effects on output of a de- crease in government spending. Can you tell what happens to investment? Why? Now consider the following IS-LM model: C = Co + G( Y - T) 1 = bo + bY - bzi Z = C+I+G i = i b. Solve for equilibrium output when the interest rate is i. Assume C + b1