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ECO 252 -- HW 9 Questions

1. Which of the following events would cause a decrease in the equilibrium interest rate in the short-run money market? For each event, simply state YES or NO.

a. The price level increases, Ceteris Paribus.

b. The FOMC conducts open market sales of existing bonds, Ceteris Paribus.

c. The aggregate demand shifts to the left, Ceteris Paribus.

d.The Fed increases the required reserve ratio, Ceteris Paribus.

e. The Fed increases the money supply, Ceteris Paribus.

f. The money demand curve shifts left, Ceteris Paribus.

To answer questions 2 and 3, you need to use the document 'Graphs_HW 9'. Click on the link to get a copy.

2. Using Graphs 1, which sequence shows the logic of the interest rate effect? A sequence would be 2, 1, 4, 3 for example. Note: you may have similar quiz questions.

3. Use Graph 2. Graph 2 represents a short run money market with a current money supply of $250 billion, an equilibrium interest rate of 4%, and a required reserve ratio of 8%. Suppose firms and consumers become optimistic and increase their spending while the Fed sets a target for the interest rate at 4%.

What open market operations should the Fed conduct? Of how many billions?

4. For each of the following event, indicate how the Fed should respond if the Fed is in charge of keeping output at its natural rate, regardless of what happens to the price level. In your answers indicate 1) if the Fed will increase or decrease the AD, 2) if the Fed will increase or decrease the interest rate, 3) if the Fed will increase or decrease the money supply, and 4) what open market operations will the Fed conduct.

a. OPEC raises crude oil prices.

b. The demand for new houses sharply decreases causing a major slow down in the housing market.

c. There is a stock market boom.

5. Suppose economists observe that an increase in government spending of $5 billion raises the total demand for goods and...
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