Unformatted text preview: l change causing a change in money demand and a shift of the LM curve.
1 ECON 2123: Macroeconomics ( Problem Set 2 Instructor: Yao Li ) 5. For this question, assume that investment spending depends only on the interest rate and no longer
depends on output. Given this information, a reduction in the money supply
a. will cause investment to decrease.
b. will cause investment to increase.
c. may cause investment to increase or to decrease.
d. will have no effect on output.
e. will cause a reduction in output and have no effect on the interest rate. Part II: Financial Markets (Chapter 4) (35 marks)
1. Given the following conditions: (all units are trillions of US $) (13 marks) d Money Demand: M = $Y (0.2 – i)
Nominal Income: $Y = 2000
Money Supply: Ms = 300
(a) Find Md for i = 10% and i = 5%. (2 marks)
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- Fall '13
- Monetary Policy