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ps6 - METU FEAS ECON 311 TA Nutiye Sekin SA Hatice pek Inst...

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1 METU, FEAS ECON 311 Fall 2009 TA: Nutiye Seçkin SA: Hatice İ pek Inst: Elif Akbostanc ı PROBLEM SET VI The Demand For Money 1. Suppose the money supply M is 200 and the nominal GDP is 4000. What is the velocity? Assume the money supply grows by 10%, but the velocity remains constant where the aggregate output is 1000. What happens to the price level? 2. Explain the Keynesian theory of money demand. What motives did Keynes think determined money demand? What are the two reasons why Keynes thought velocity could not be treated as a constant? 3. What factors determine the demand for money in the Baumol-Tobin analysis of transactions demand for money? How does a change in each factor affect the quantity of money demanded? 4. What factors determine money demand in Friedman's modern quantity theory? How does each affect money demand? What determines velocity in Friedman's theory? What effect do interest rates have on velocity? 5. Describe what the liquidity trap is. Explain how it can be problematic for monetary policymakers. 6. In the Baumol-Tobin model, given that total costs for an individual equals 2 T 0 iC C b + , where T 0 = monthly income, b = brokerage costs, and C = amount raised from each bond transaction, derive the so-called square root rule. Transmission Mechanism of Monetary Policy 1. Suppose you want to apply a graduate program in economics and want to know whether the New York University is better than the Carnegie Mellon University for your future goals. One way to find out is to ask the graduates of both universities about this situation. Another way is to visit these universities and see which one is better for you. Which procedure will provide reduced-form evidence and which structural model evidence? What will be the advantages and disadvantages of these two procedures?
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