# Ans. of PS3 Econ 202 - METU Department of Economics ECON202...

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1 METU Department of Economics ECON202 Macroeconomic Theory Fall Semester 2014-2015 Instructor: Şirin SaraçoğluTA: Fatma TaşdemirAns. of PROBLEM SET III (Blanchard, Johnson Chapter 4) PART A: TRUE/FALSE/UNCERTAIN 1.The price of bonds increases when the interest rate rises. 2.The money multiplier is always less than 1. PART B: LONG QUESTIONS Q.1 (All units are trillions of US\$)
2 Money Demand: 𝑴𝑫= \$𝒀(𝟎. ? − 𝒊)Nominal Income: \$𝒀 = ?𝟎𝟎𝟎Money Supply: 𝑴𝑺= ?𝟎𝟎a.Find MDfor i=10% and i=5%. b.What is the relationship between i and MD. c.Graph MSand MDand calculate the equilibrium i. d.Alan Greenspan decreases MSby 50. What happens to money market equilibrium? (Solve & graph).
3 e.Describe how the Fed changes i in the US.
a.Find CUd, Rdand Ddin equilibrium.
4 b.Find the money multiplier. c.Describe 2 different ways the Fed can decrease money supply. d.If the Fed wants to decrease the money supply by \$500 million (in order to raise i), what amount of bonds would it have to sell / buy?
5 Q.3 Consider a fractional reserve banking system. The central bank supplies the monetary base B by giving an amount of cash to the public, in the form of currency C, and to banks, in the form of reserves R. Banks can open deposit accounts to the public D. The public can make loans from banks, and in turn bank can use the assets create by these loans L, in order to further open deposit accounts D. Banks like opening deposit accounts and loaning to the public, and they do so as much as they can. Total money supply M is M = C + D a.In what sense do banks “create money” in this simple setup?
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