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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- Consider the model we discussed in class without checkable deposits characterized by money supply (M") and money demand (M4) represented in the following forms: M = M, M = SYL(1) Suppose the linear functional form of the liquidity demand equation: L(1)=2.4-3i Question 1.A Write down the equilibrium condition in this financial market. Solve for the equilibrium interest rate mathematically and depict it graphically, taking the zero lower bound into account. Question 1.B Often, since central banks are unsure of the exact money supply in the economy, instead of choosing one specific money supply, they target a range (an upper and lower bound). Suppose the central bank is targeting an interest rate between 14 = 0.1 and ip = 0.2 (also known as 10% and 20%). What range of money supply would guarantee these interest rates? Denote these as MA and Mp. Let SY 1. Depict this graphically.Suppose that the Money Supply is currently at $13,000, and that Money Demand is given by: MD= 23,000 - 2,000r where r is the interest rate, and for the purposes of the functional form above, if the interest rate = 8%, the r = 8 for derterming MD. Suppose that we start in equilibrium in the money market and the Central Bank targets the interest rate. If the Central Bank raises the interest rate by 2%, then how large will the surplus in the Money Market be if the Central Bank does not adjust the Money Supply (MS)? Note: round your answer to two decimal places. Also, if the answer is $2,678 for example, input this as 2678.00Suppose 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.
- Consider the same economy as in the previous question with the supply of money fixed at $2000. Now suppose there is a shift in the money demand equation such that households in aggregate desire to hold an additional $150 in cash balances for any given level of interest rates. (a) Calculate the effect this has on the equilibrium interest rate (to two decimal places). (b) What would the central bank have to do to offset this effect?In class we assumed that money demand depends upon income, Md = L(Y, i). However, if people hold money as a medium of exchange it may be that money demand really should depend upon consumption, Md = L(C, i). In other words, if people consume more, they will also want to hold more money. Suppose that consumption, as usual, depends upon disposable income, C = C(Y – T). Money demand will then also, indirectly, depend upon disposable income, Md = L[C(y - T), i]. True or False: In this case, a tax cut will always increase in the short runWhat 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.
- Suppose an economist believes that the price level in the economy is directly related to the money supply, or the amount of money circulating in the economy. The economist proposes the following relationship: P=A×MP=A×M • P=Price LevelP=Price Level • M=Money SupplyM=Money Supply • A=A composite of other factors, including real GDP, that change very slowly over time.A=A composite of other factors, including real GDP, that change very slowly over time. How might an economist gather empirical data to test the proposed relationship between money and the price level?In the real sector, the following data are available:Consumption Function C = 100 + 0.75YInvestment function I = 60 - 200r Meanwhile, the Monetary sector provides the following data:The amount of money in circulation = 500Money demand function for Transactions and just in case L1 = 0.2YMoney demand function for Speculation L2 = 428 - 400r Question: a. Determine the interest rate at the time of the General Equilibrium, and what is the equilibrium national income b.Prove that the General Equilibrium really exists! c. The general equilibrium conditions mentioned above can be expressed in a graphIn the model SIM of chapter 3 of the book of Godley, Wynne, and Marc Lavoie. 2012. Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth. 2nd ed. 2012 edition., starting from a stationary state simulate the effect of an increase in government expenditure under four variations of the model: a model where expected disposable income is the weighted average of the two previous periods disposable income: Y De = 0.5 ∗ Y D−1 + 0.5 ∗ Y D−2 Discuss the trajectory of output from the original stationary state to the new one.
- 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.Deriving the aggregate demand curve from the quantity equation of money allows the aggregate demand curve to be written as P = MV / Y. If V = 3, and M = 1,000, then P = 3,000 / Y, and the slope of this function is:Assume a two-sector economy model is given by: Y = C + I, C = 97 + 0.7Y, I = 180 – 125i Ms = 255, L1 = 0.2Y, L2 = 220 – 175i where Y is income, C is consumption, I is investment, i is rate of interest, Ms is money supply, L1 is transactionary demand for money and L2 is speculative demand for money. Find the equilibrium income level and interest rate, together with equilibrium levels of C, I, L1 and L2. Show what happens to the equilibrium conditions if autonomous investment falls from 180 to 110. Demonstrate your answers to (a) and (b) graphically. Assume that the demand function for a commodity is given by Qd = 3 – 0.1P and that the supply function is given by Qs = 1 + 0.05P, where P is the price, Qd is the quantity demanded and Qs is the quantity supplied. Suppose the government levies a tax of t cedis per unit sold. If the market is in equilibrium and the tax is increased, show how the price, quantity and tax revenue will change…