Open market purchase or sale of securities

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Reference no: EM137606

Q. The money demand as well as curve is given by the following equation: Md = 5,000 - 10,000r + 5Y Md is money demand as well as, r is the real interest rate, as well as Y is aggregate income.

a) Why does the equation have a negative value for the second term as well as a positive value for the third term?

b) Assume that the equilibrium interest rate is 30% (r = 0.3). Calculate money demand as well as. Assume Y = 5,000. At the existing interest rate, there is an excess (demand as well as/supply) of money?

c) What will be the new equilibrium interest rate?

d) How much must the money supply increase to restore the original interest rate (r=0.3)?

e) The required reserve ratio is 10%. How great an open market purchase or sale of securities should the central bank undertake to restore the original interest rate (i.e. what is the values of purchase/sale of bonds)?

Reference no: EM137606

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