as a guide, use the LM curve with the zero lower bound and term premium and risk premium to graph the LM curve for the government bond rate and the LM curve for the private bond rate at interest rates between 0 and 8, with intervals of one-half of a percentage point. Shown in the previous diagram. Week 5 EC301 2 011 (e) Use the graphs of the IS curve and the three LM curves to explain what the equilibrium interest rates for the federal funds rate, the government bond and rate, the private bond rate are and what the equilibrium level of income is. For the federal funds rate, the equilibrium is at r = 3.33, Y = 13833.33 which is given by the intersection of the IS curve (Y = 15500 -500r) and LM curve (Y=13500+100r). For the government bond rate, the equilibrium is at r = 5, Y = 13000 which is given by the intersection of the IS curve (Y = 15500 -500r) and LM curve (Y=12500+100r). For the private bond rate, the equilibrium is at r = 6.7, Y = 12165 which is given by the intersection of the IS curve (Y = 15500 -500r) and LM curve (Y=11500+100r). Problem 13-1 M1 consists of currency, demand deposits, other checkable deposits, and travelers checks. Therefore, M1 equals $915.00 + 507.00 + 405.20 + 4.70 = 1,831.9 billion. M2 consists of everything in M1, plus money market mutual funds, savings deposits, and smalldenomination time deposits. Therefore, M2 equals $1,831.9 + 711.1 + 5,317.9 + 943.3 = 8804.2 billion Problem 13-2 Since the amount of the money supply equals the money multiplier times the amount of highpowered money, the amount of high-powered money equals the amount of the money supply divided by the money multiplier. The money multiplier equals (1 + c)/(e + c), where c is the fraction of deposits that people want to hold in cash, and e is the fraction of deposits that banks hold in the form of reserves. Therefore, the money multiplier equals (1 + 0.08)/ (0.07 + 0.08) = 1.08/15 = 7.2. Therefore, the amount of high-powered money necessary for the Fed to have a money supply equal to $6,228 billion equals $6,228/7.2 = $865 billion.
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