ECOS2002 - Tutorial 3
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ECOS2002 - Tutorial 3
Tutorial 3! The Money Market
1. What are the two main determinants for the demand of money?
2. Suppose that money demand is given by:
MD = $Y (0.25 − i)
where Y = 100. Suppose that the supply of money is 20 dollars. Assume equilib- rium in financial markets
(a) How is the equilibrium in the money market defined?
(b) What is the equilibrium interest rate?
(c) What is money demand in equilibrium?
(d) What is the impact on the interest rate if money supply suddenly increases?
(e) If the Reserve Bank wants to increase i by 5 per cent (that is, from 5 per cent to 10 per cent), at what level should it set the supply of money?
3. Consider the following money market model:
Md = L(Y, i)
Ms = M¯
For each of the scenarios below, what is the effect on the equilibrium interest rate and the equilibrium amount of money. Use a graph in your answer.
(a) The central bank conducts expansionary (quantity-setting) monetary policy. (b) During a recession household income falls.
4. Discussion
In the lecture and the tutorial, we have shown the effects money supply changes by the central bank. Do you think this is a realistic description of modern monetary policy?
2023-01-08