# PSU Economics 351 online HOMEWORK #6 (40 points total)

Name
___________________________________________ last 4 PSU ID ___________

HOMEWORK
#6 (40 points total)
Economics
351 online

Read
these instructions carefully!

Carefully
answer each of the questions below..5in;’=”” list=”” lfo1;=”” l3=””>You
need to show your work, not just the final answer.5in;’=”” list=”” lfo1;=”” l3=””>You
can write or type your answers for the questions.5in;’=”” list=”” lfo1;=”” l3=””>Please
put your name and PSU ID number at the top of the 1st page.5in;’=”” list=”” lfo1;=”” l3=””>You
may use as many sheets of paper as you need.
.5in;’=”” list=”” lfo1;=”” l3=””>If
you did parts by hand:.0in;’=””>Scan
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hand) .0in;’=””>Save
the file on your computer (.PDF format preferred) and then upload it to the
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the separate PDFs into one file using a service such as (.pdfmerge.com/”>PDFMerge!).0in;’=””>Failure
to submit a single file will result in points being deducted.5in;’=”” list=”” lfo1;=”” l3=””>If
you typed everything:.0in;’=””>Save
the file on your computer (.doc or .docx format) and then upload it to the
ANGEL dropbox for this homework assignment..0in;’=””>Be
sure your assignment is all on one file. Failure to submit a single file will
result in points being deducted
The initial conditions in the money market are as
follows:
rr = .10

C = 400

D = 1200

ER = 10

Md = 1200 + .5Y – 100i

Where Y is given and equal to 2000. We assume the price level equals 1 so that
nominal money demand and money supply is the same as real money demand and real
money supply.

(5 points) Calculate the monetary base, the money
multiplier, and the money supply by using m x MB(5 points) Find the interest rate that clears the money
market.

Draw a money demand money supply diagram that depicts these initial conditions
as point A. A completely labeled diagram
is worth 10 points.

Suppose that conditions in the
money market change and that the ‘new’ money demand function is now:

Md = 1300 + .5Y – 100i

this is the only change

(5 points) Name three reasons that money demand would
change like this.

(5 points) Solve for the new equilibrium interest rate
that clears the money market and label on your diagram as point B.

(5 points)
Explain the intuition as to why the interest rate changed the way it
did.

(5 points) What type and how many open market
operations must the Fed conduct to keep interest rates at the initial level as
at point A (round to the nearest integer)? Label this new point as point C.

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