Transcribed image text: Aded areas indicate U.S. recessions Source: Organisation for Estnomic Cooperation and Gentlopment Figure 6: The amount of interest paid each year on the public debt, in the USA (solid) and Greece (dashed). 7. (10 points) In the above graphs, we see how much the United States and Greece pay each year in interest on their public debt. a. (5 points) What are some problems of raising government debt? Please list at least two problems. b. (5 points) Explain why Greece was probably less able to use both Fiscal and Monetary policy tools to fight the 2008 recession, compared to the United States. 6. (16 points) Suppose the market for money holdings (meaning, the liquidity preference model) is in equilibrium at an interest rate of 5%. The reserve ratio is 5%. a. (5 points) Suppose the Federal Reserve carries out an open market sale of 120 million U.S. Treasury bonds. Calculate the change in money supply and depict the effect this will have in the market for money holdings. b. (5 points) Based on part a, the Federal Reserve carries out an open market sale in the short run. Depict the long run effect of the interest rate using the liquidity preference model (Hint: money neutrality in the long run). c. 6 points) Suppose we have an economic recession, and the interest rate is already at zero. Explain the zero lower bound problem and the liquidity trap to discuss how effective the open market operation in simulating aggregate demand will be. Transcribed image text: Aded areas indicate U.S. recessions Source: Organisation for Estnomic Cooperation and Gentlopment Figure 6: The amount of interest paid each year on the public debt, in the USA (solid) and Greece (dashed). 7. (10 points) In the above graphs, we see how much the United States and Greece pay each year in interest on their public debt. a. (5 points) What are some problems of raising government debt? Please list at least two problems. b. (5 points) Explain why Greece was probably less able to use both Fiscal and Monetary policy tools to fight the 2008 recession, compared to the United States. 6. (16 points) Suppose the market for money holdings (meaning, the liquidity preference model) is in equilibrium at an interest rate of 5%. The reserve ratio is 5%. a. (5 points) Suppose the Federal Reserve carries out an open market sale of 120 million U.S. Treasury bonds. Calculate the change in money supply and depict the effect this will have in the market for money holdings. b. (5 points) Based on part a, the Federal Reserve carries out an open market sale in the short run. Depict the long run effect of the interest rate using the liquidity preference model (Hint: money neutrality in the long run). c. 6 points) Suppose we have an economic recession, and the interest rate is already at zero. Explain the zero lower bound problem and the liquidity trap to discuss how effective the open market operation in simulating aggregate demand will be