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f01_ps2ans

# f01_ps2ans - 14.02 Problem Set 2 Solutions I True/False 1...

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14.02 Problem Set 2 Solutions I. True/False 1. False. The multiplier is 1 1 c 1 1 t . The effect is dampened because taxes also respond to the increase in output. 2. True. Bonds plus Money are wealth. All are stocks. 3. False. Interest rates do increase because the M d shifts up and to restore equilibrium for a given M s interest rates on bonds increase to increase (not reduce) the demand for bonds. 4. False. Currency plus reserves are high-powered money (H), so when Fed does an OMO and sells bonds (on its assets side), then H goes down (on its liabilities side). The sale of bonds leads their price to fall and thus the interest rate on them to rise. II. Short Questions 1. b. Remember that an increase in H will have a greater effect on M the larger the money multiplier. The money multiplier is larger (for a given required reserve ratio) the smaller the amount of currency people hold to the proportion of their money demand.

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f01_ps2ans - 14.02 Problem Set 2 Solutions I True/False 1...

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