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Unformatted text preview: is the relationship between i and Md. (2 mark)
(c) Graph Ms and Md and calculate the equilibrium i. (3 marks)
(d) Now decreases Ms from 300 to 250. What happens to money market equilibrium? (solve & graph ) (4
(e) Describe how the central bank can increase/decrease interest rate i. (2 marks)
2. Consider a bond that promises to pay $100 in one year. (7 marks)
(a) What is the interest rate on the bond if its price today is $75? $85? $95? (3 marks) (b) What is the relation between the price of the bond and the interest rate? (2 mark) (c) If the interest rate is 8%, what is the price of the bond today? (2 mark) 3. ATMs and Credit Cards (10 marks)
This problem examines the effect of the introduction of ATMs and credit cards on money demand. For
simplicity, let’s examine a person’s demand for money over a period of four days.
Suppose that be...
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- Fall '13