macroeconomics

The interest rate were zero under the old government.The GDP is $700 and at that time people kept a total of $120 in cash stored as well as %50 worth of bonds. However, under new government the interest rate has risen to 36%. On average, cash is used five times in a year to buy and sell goods. Also on average, a change in the interest rate of 2% causes a change in money demand of one dollar. If the new government wants to keep the money supply fixed at a total of 260 cash:

a) the demand for bonds will tend to decrease

b)total money demand equals $310 and the interest rate will tend to rise

c)there is a surplus of cash in the economy which will tend to force the interest rate to rise

d)the interest rate will tend to fall


could anyone figure out the right answer? I really don't know how to do this question. If you do know, please tell me the reasons as well..

much thanks..!

I think it might be D. I don't know if I am right.

The question doesnt make any sense to me as many parts of your "givens" do not balance. First, do you mean $50 in initial bonds??

Lets start with the basic equation MV=PQ. You are given that V=5 and M=120. So, PQ=GNP should be $600. You are told that GDP=700. Where is the missing $100. Is there a missing foreign sector we are not told about?? Or, are the bonds treated as "near money" with a velocity of 2?? Or is it the case that the given V=5 only applies under the new government?? And why would anybody hold bonds when the interest rate is zero??

So, then we are told that interest rate rises to a whopping 36%. Further for each 2 points of interest, the demand for money changes by 1 dollar. Since interest rates and the demand for money are inversely related, the demand for money should drop from 120 to 102.

Now we are told that the govt wants to keep the supply of money fixed at $260. Hummm, how will it do that when we are told that at zero interest rate, the demand for money is $120. To get to $260, interest rates would need to go negative. (which doesnt make any sense).

That said, Answer d is the only option that makes any sense.

  1. 👍 0
  2. 👎 0
  3. 👁 90
asked by sw

Respond to this Question

First Name

Your Response

Similar Questions

  1. Macroeconomics* Please check my answers*

    If real GDP per capita grows at a rate of 5% per year consistently over time, how many years would it take for it to double in size? 5 10 My answer 14 70 The purpose of indexing Social Security payments to the CPI is to ______.

    asked by Ms. Douglas on November 18, 2009
  2. Economics

    If a government raises its expenditures by $50 billion and at the same time levies a lump-sum tax of $50 billion, the net effect on the economy will be to: a. increase GDP by less than $50 billion b. increase GDP by more than $50

    asked by Amy on November 5, 2006
  3. Economic

    All of the following refer to the Economy of Ecoland: - GDP in 1990 is $1000 - Annual inflation is 5% per year from 1991 - 1995. From 1996 - 1999, inflation is 10% per year - Real GDP grows at 2% every year a) Calculate real GDP

    asked by Freddy on February 7, 2007
  4. Economic Question

    Sorry, this is a little long, hope somebody could give me some help. Thanks in advance. Consider the exchange rate of the dollar for the euro. Suppose that the liquidity function L(i) is the same in both the United States and

    asked by Leo on June 21, 2008
  5. economic

    1. If C = 1000 + 7/8[GDP-1000], I = 700 and G = 1000 and the economy is currently in equilibrium at 400 below full employment GDP, the correct fiscal policy would be to increase G by? (Points: 2) 2. If C = 500 + 3/4[GDP- 100], I =

    asked by Marieanne on November 30, 2008
  6. Economics

    1) If C = 1000 + 7/8[GDP-1000], I = 700 and G = 1000 and the economy is currently in equilibrium at 400 below full employment GDP, the correct fiscal policy would be to increase G by? 2) If C = 500 + 3/4[GDP- 100], I = 300, G =

    asked by Shanna on April 3, 2009
  7. math

    Find the total number of compounding periods and interest rate per period.  Princial: $700, time period :8yrs , nomial rate: 1.5%, interest compounding :monthly, copounding amount________, compound interest_______  * i need to

    asked by Anonymous on June 4, 2014
  8. Macroeconomics

    Assume that the economy’s real GDP is growing. What will happen to money demand over time? If the Fed leaves the money supply unchanged, what will happen to the interest rate over time? If the Fed changes the money supply to

    asked by John on June 15, 2010
  9. Purchasing Power of Income/ Economy

    We use the _________ to determine the purchasing power of income. A. Interest rate. B. Real GDP. C. CPI. D. GDP. E. None of the above. Check this site for your answer. http://www.bls.gov/cpi/

    asked by Dave on June 14, 2007
  10. business math

    using the exact interest method 365 days, find the amount of interest on the following loans, principal is $1,700, the rate is 121/2 percent, time days is 33. what is the exact interest

    asked by Anonymous on July 5, 2013

More Similar Questions