27 February 2019
Macro Unit 4 Problem Set
1. Define and give specific examples of transaction demand for money and asset demand for money
a. Transaction demand for money is people hold money for everyday transactions. For example, lunch money and bus fee would be a transaction demand. Asset Demand for Money is people hold money since it is less risky than other assets. For example, there is a recession happening and people don’t invest in anything because they don’t want to lose all of their money.
2. Money Market Graph
a. See attached. The demand for money downward sloping because people want to hold less of their wealth in the form of money the higher that interest rates on bonds and other alternative investments are. There is an inverse relationship between interest rates and investment. There is also an increase in money supply as interest rate decreases. That means that aggregate demand will increase because there will be more investments.
b. See attached.
3. Fiscal Policy and Monetary Policy
a. If the economy is in a recession, an expansionary fiscal policy would be utilized. Fiscal policy tools, actions by the congress, are much quicker than monetary tools, actions by the federal reserve bank. Additionally, they are used to close the recessionary gap by increasing the money supply of the economy in some way. The central bank can fight recession by decreasing reserve requirement for banks, decrease discount rate, and buy bonds; all of which add money into the economy.
b. If the economy is an inflationary stage, the bank can increase reserve requirement, increase discount rate, and sell bonds. The Central bank might be called to fight inflation because fiscal policies to fight inflation are not preferred by the voting public as it is hard to get reelected when politicians increase taxes or decrease government spending.
a. See attached.
b. Crowding out is a situation where personal consumption of goods and services and investments by business are reduced because of increases in government spending and deficit financing sucking up available financial resources and raising interest rates. This means that businesses cannot invest in anything which does not help with closing the recessionary gap as a result.
5. See attached.
i. 60 million
ii. 60 * 5 = 300 million
b. This would increase the money supply, meaning that expansionary...