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 onehalf 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 131 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 132 Since the amount of the money supply equals the
money multiplier times the amount of highpowered money, the amount of highpowered 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 highpowered 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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 Summer '13
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 Monetary Policy, lm curve

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