5 EC301 2 011 Problem Week 5

# As a guide use the lm curve with the zero lower bound

• Notes
• 1
• 100% (2) 2 out of 2 people found this document helpful

This preview shows page 1. Sign up to view the full content.

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.
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern