PS5 - Department of Economics University of California...

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. . . more Department of Economics Fall 2007 University of California Economics 100B Berkeley Professor Olney Problem Set #5 (15 points possible; 3 percent of course grade) Due: To Your GSI In Section, Monday November 19 & Tuesday November 20 Your answers should be written on the answer sheet provided. Staple your work (on 8½x11 paper) to the back of your answer sheet. You must attach your work or you will receive no points. Be sure to write your section day/time and GSI’s name at the top of the answer sheet. Write your name at the top of every attached page. Late problem sets will be penalized 5 points per day. No problem sets are accepted after the solutions are posted. Your submitted work must be your own: Problem sets that are identical (in whole or in part) to another problem set will receive a score of zero (0). Problem sets should NOT be left in GSI mailboxes. Papers can be stolen from those mailboxes. We are not responsible for problem sets that are not handed directly to your GSI. 1. (2.5 points total) Suppose real money demand can be described by the equation M d /P = 0.5Y - 20,000i. Suppose the real money supply is 4,000. A. (1 point) When income is 10,000, what is the equilibrium nominal interest rate? When instead income is 11,000, what is the equilibrium nominal interest rate? B. (½ point) Suppose the real money supply is increased by 10 percent. If income remains 10,000, what is the new equilibrium nominal interest rate? C. (½ point) Explain why bond prices and interest rates are inversely related. D. (½ point) The central bank decides to decrease nominal interest rates. What effect will this have on the real money supply? Why? 2. (2 points total) Suppose the economy can be described by the following equations.
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