ss04 - University of Toronto Economics Department...

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University of Toronto Macroeconomics, Theory and policy Masoud Anjomshoa Economics Department Solution set #4 Disclaimer: These solutions are just guidelines for you, and may NOT include a complete solution for the questions and problems in your homework, as you must present in your assignments and/or exams. In your solutions you must show your work, and demonstrate your line of thinking clearly. Please, always check my calculations for unintentional typos or miscalculations. --------------------------------------------------------------------------------------------------------------------------------- Chapter 4. Q1. a. False. Income is a flow variable, while wealth is a stock variable. b. False. Changes in interest rate can change the opportunity cost of holding money, so the demand for money. c. If the total wealth and demand for money are known, then the difference would determine the demand for bonds. d. True. They can increase the money velocity. (See the example below) e. False. These two move in opposite directions. Because L(i) is an decreasing function in i. [$Y/M= 1/L(i)] f. False. Selling bonds by central bank leads to lower money supply. g. Price of bonds and interest rate always move in opposite direction ---------------------------------------------------------------------------------------------------------------------------------- Chapter 4. Q2. a)- i= 5% , Y=60000 M d = 60000(0.35 - 0.05) M d = 18000 demand for bond = 50000 – 18000 =32000 i= 10% , Y=60000 M d = 60000(0.35 - 0.1) M d = 15000 demand for bond = 50000 – 15000 =35000
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ss04 - University of Toronto Economics Department...

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