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Nominal interest rates in a dynamic model of money

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Reference no: EM131687546

Please answer the questions to your greatest knowledge and provide work.

1. Suppose the money demand equation is as follows:

MD = P * [(0.13 * Y) - (65 * i)]

Suppose that initially P = 1, Y = 8,000 and i = 4. If Y increases to 10,000 and price level does not change, by how much should the Fed increase the money supply if it wants interest rates to remain stable?

2. What are the various causes of higher nominal interest rates in a dynamic model of money? What is the impact of each on money demand?

3. Which factors will result in shifting the long-run aggregate supply (LRAS) curve to the right?

4. Which factors when decreased, will result in shifting the aggregate demand (AD) curve to the left?

5. How do changes in interest rates change consumption patterns and budget constraints when using a two period model? How might that explain policy decisions during the most recent recession?

Reference no: EM131687546

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