exam2MW - ECONOMICS 205 PRINCIPLES OF MACROECONOMICS FALL...

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ECONOMICS 205: PRINCIPLES OF MACROECONOMICS FALL 2007 MARK MOORE EXAM 2 (Monday-Wednesday Section) I. Monetary Policy: Money Targeting Questions 1 - 3 are related. The questions take you through the analysis step by step. 1. (20 Points) Suppose there is a sudden increase in the demand for deposits, unrelated to any economic variables in our model. We will call a sudden change in the demand for deposits a money demand shock. a. Show the effect of the increase in the demand for deposits in a diagram representing the Federal funds market. Make sure to explain why any curve or curves shift. b. What is the effect of the increase in the demand for deposits on the interest rate? What is the effect on the quantity of reserves (the variable on the horizontal axis in the Federal funds diagram)? c. Given your answer to part (b), show the effect of the increase in the demand for deposits on the income-expenditure diagram. Again, explain why any curve or curves shift. d. Given your answer to part (c), show the effect of the increase in the demand for deposits on the AD-AS diagram.
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