What are the three motives for the demand for money in the Theory of Liquidity Preference? List them and give a brief description of each. Now, combine the three motives into a single equation for the demand for money, using the linear equation
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- What are the three motives for the
demand for money in the Theory of Liquidity Preference? List them and give a brief description of each. Now, combine the three motives into a single equation for the demand for money, using the linear equation we focused on in this class. State the equation and explain in words each of the components of the equation. Lastly, is this equation “stable”, meaning in this context that the money function, once drawn, seldom changes? If so, ismonetary policy to keep interest rates near a chosen target easy or hard. If not, if money demand is unstable, what does that mean for the ability of the Fed to stabilize interest rates near a chosen target?
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- give your own detailed explanation of liquidity preference theory and how the demand for money curve is determined. illustrate your answer graphically. explain in detail each component of the demand for money as well as the determinants of each componentCan you please help with the explanation of the below? In contemporary monetary theory, we do not normally think of using a money stock to implement monetary policy. By setting m-p, the log of the real money stock, equal to money demand y-b.i where y and i are ln(GDP) and the interest rate, create a money policy reaction function. Noting that p+y is the log of nominal GDP how could you interpret m in this case so as to make your equation approximate the reality in Australia?Which monetary policy tool can the Federal Reserve use to conduct an expansionary monetary policy (please state at least one instrument)? Which monetary policy instrument can the Fed use to conduct a restrictive monetary policy? Assume the country is experiencing high unemployment and a recession, such as during 2001, 2008-2009, and 2020. What is the Fed likely to do in this scenario? Discuss the effects of such policy on the economy. Can you give a specific example to what the Fed did during any of those recessions?
- 1. Walras’s law is derived from the budget constraints of all the economic agents in the economy. Can Say’s law be similarly derived from budget constraints? Use the relevant constraints and specify the additional assumptions needed for this derivation. Assess the validity of these assumptions. 2. What are the implications for monetary policy if both Walras’s law and Say’s law are imposed on the IS–LM model? Assess the likely validity of these implications. If they do not seem to be valid, which of these two laws should be discarded? Derive the implications for monetary policy of imposing the remaining law on the IS–LM model.Suppose the Fed decided to sell $100 billion worth of government securities in the open market. Assume all payments are directly deposited into or withdrawn from the banking system. What impact would this action have on the economy? Specifically, answer the following questions. Instructions: Enter your responses as a whole number. If the lending capacity or aggregate demand falls be sure to include a negative sign (-) with your answer. b. By how much will the banking system’s lending capacity change if the reserve requirement is 20 percent? d. By how much will aggregate demand initially change if investors change their behavior because of this change in available credit?I need help solving a question regarding the Diamond-Dybvig model. Specifically (Calculating the bank's profit after t = 2. In other words, what amount of funds remains at the bank once all depositors have withdrawn? ). For context, the question states there are three periods ( t = 0, 1, 2), a single consumption good, and an illiquid investment oppurtunity that pays gross return 1.1 if liquidated at t = 1, or gross return 2.2 if liquidated at t=2. There are 30 people in the economy endowed with with 1 unit of the consumption good at t = 0. At t = 1, exactly 11 will randomly realize that they need to consume at t = 1 (the early consumers), the remaining 19 people will need to consume at t = 2 (the late consumers). The utility derived from consumption is 1 − (1/c1)2 for early consumers, 1 − (1/c2)2 for late consumers, where the subscript denotes the time of consumption.
- Suppose that the bank of Canada uses money to buy bonds in financial markets during a recession. a) Use the theory of liquidity preference to graphically illustrate the impact of this purchase of bonds in open markets by the bank of Canada on the equilibrium interest rate in the market for real money balances. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curve shifts; and v. the terminal equilibrium values. Explain what happens to the equilibrium interest rate.Assume a two-sector economy model is given by: Y = C + I, C = 97 + 0.7Y, I = 180 – 125i M s = 255, L 1 = 0.2Y, L 2 = 220 – 175i where Y is income, C is consumption, I is investment, i is rate of interest, M s is money supply, L 1 is transactionary demand for money and L 2 is speculative demand for money. a) Find the equilibrium income level and interest rate, together with equilibrium levels of C, I, L 1 and L 2 . b) Show what happens to the equilibrium conditions if autonomous investment falls from 180 to 110. c) Demonstrate your answers to (a) and (b) graphically.Given the Taylor rule equation below, what should the current Federal Reserve target value be for the fed funds rate (i_ff)? You will need to look up on FRED: 1) current inflation rate, p, and 2) current GDP growth rate, y; you should also assume that: 1) the current real rate of interest, r, is 0.15% (that is, 15/100 of a percent; almost zero!); the targeted inflation rate, p*, is 2%; and the targeted GDP growth rate, y*, is 2.75%
- Consider the following numerical example of the IS-LM model: C = 200 + 0.25YD I = 150 + 0.25Y - 1000iG = 250 T = 200 i = .05 a. Derive the IS relation. (Hint: You want an equation with Y on the left side and everything else on the right.) b. The central bank sets an interest rate of 5%. How is that decision represented in the equations? c. What is the level of real money supply when the interest rate is 5%? Use the expression:(M>P) = 2Y - 8000i d. Solve for the equilibrium values of C and I, and verify the value you obtained for Y by adding C, I, and G. e. Now suppose that the central bank cuts the interest rate to 3%. How does this change the LM curve? Solve for Y, I, and C, and describe in words the effects of an expansion-ary monetary policy. What is the new equilibrium value of M/P supply? f. Return to the initial situation in which the interest rate set by the central bank is 5%. Now suppose that government spending increases to G = 400. Summarize the effects of an expansionary…Please pleaseee do this Question : For this question assume that the real money demand function is L(R, Y) = kY - hR where k > 0 represents the sensitivity of the money demand to income and h > 0 represents the sensitivity of the money demand to the interest rate. Suppose that these sensitivity parameters are not known for the economy of Macroland and there are two possibilities: it is either i) high k and low h, or ii) low k and high h. To understand which one of these two scenarios is correct you analyze a given policy change: an increase in the overall level of taxes. Using the AA-DD model, compare and contrast the short run effects of this policy change in Macroland under these two scenarios. Explain your results intuitively.What is the basic determinant of ( a ) the transactions demand and (b) the asset demand for money? Explain how these two demands can be combined graphically to determine total money demand. How is the equilibrium interest rate in the money market determined? Use a graph to show the impact of an increase in the total demand for money on the equilibrium interest rate (no change in money supply). Use your general knowledge of equilibrium prices to explain why the previous interest rate is no longer sustainable.
