assignment-macro-Question-2.docx - Question 2 a i An...

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Question 2 a i) An increase in the reserve requirement ratioMDE1E00where the MD curve and MS0curve are intersect.The equilibrium interest rate is r0and equilibrium quantity of money isM0. When the central bank buys the government securities in the open market, thequantity of reserves increase and the money supply increase. The money supply curve willshift to the right from MS0to MS1. The new equilibrium point is E1where the MD curve and MS1curve are intersect.The interest rate decrease from r0to r1and the quantity of money increase from M0to M1.rMS0MS1r1r0Quantity of money (M)M0M1
ii) The central bank buys the government securities in the open marketE0 The initial equilibrium point is E0where the MD curve and MS0curve are intersect.The equilibrium interest rate is r0and equilibrium quantity of money isM0. When the central bank buys the government securities in the open market, thequantity of reserves increase and the money supply increase. The money supply curve willshift to the right from MS0to MS1. The new equilibrium point is E1where the MD curve and MS1curve are intersect.The interest rate decrease from r0to r1and the quantity of money increase from M0to M1.rMS0MS1r1r0Quantity of money (M)M0M1MS1MS0rMDr0E1r1Quantity of money (M)M1M0
iii) A decrease in the bank rateE0MS1MS0r0r1E1MDQuantity of money (M)M1M0
b) Assume that the following equations represent goods and money market for an economy.C =60 + 0.8YdI=150 – 1000 rG =250T =200MS/P =100MD/P =40 + 0.1Y – 1000 rP=1i)Derive the equation for the IS and LM curve.
ii) Compute the equilibrium levels of output and interest rate. rMS1MS0r0r1E1MDQuantity of money (M)M1M0

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