1. Suppose the Federal Reserve System (Fed) implements an open market sale of securities (bonds) and a simultaneous increase in the discount rate. Using the Keynesian IS-LM framework analyze and clearly state the effects of these two Fed measures on the equilibrium levels of aggregate income and interest rate. Be sure to properly label all parts of your diagram. 2. Suppose the interest sensitivity (elasticity) of money demand in the economy increases and concurrently the interest sensitivity (elasticity) of investment expenditure decreases. Using the Keynesian LS-LM model analyze and clearly state the effects of these two shifts/changes on the equilibrium levels

1. Suppose that the economy has the following money supply and demand equations: Money Supply: M = 8000Money Demand: M= 10,000 – 40,000rwhere money is in billions of dollars and interest rates, r , is written as a decimal(e.g., an interest rate of 10% would be written as .1 in the equation).A. Determine the equilibrium interest rate and quantity of money.B. What will happen in the money market if the interest rate is currently 10%?What is the amount of excess supply of or excess demand for money?C. Show in graph that at this interest rate (10%) there is disequilibrium in themoney market.

Suppose that the economy has the following money supply and demand equations: Money Supply: M = 8000Money Demand: M= 10,000 – 40,000rwhere money is in billions of dollars and interest rates, r , is written as a decimal(e.g., an interest rate of 10% would be written as .1 in the equation).A. Determine the equilibrium interest rate and quantity of money.B. What will happen in the money market if the interest rate is currently 10%?What is the amount of excess supply of or excess demand for money?C. Show in graph that at this interest rate (10%) there is disequilibrium in themoney market.2. Assume that a particular bank has excess reserves of Php800,000 and checkabledeposits of Php1,500,000. If the reserve ratio is 20%, what is the size of the bank’sactual reserves?3. Suppose that GRAB Bank is a newly created bank in your hometown. Consider thefollowing transactions: Owners of the bank sold shares of stocks to the public (which includes owners’equity) amounting to P1,000,000. To fully…

Question 4. Suppose that the bank of Canada uses money to buy bonds in financial markets during a recession. a. Use the theory of liquidity preference to graphically illustrate the impact of this purchase of bonds in open markets by the bank of Canada on the equilibrium interest rate in the market for real money balances. Be sure to label: į. the axes; ii. the curves; i. the initial equilibrium values; iv. the direction the curve shifts; and v. the terminal equilibrium values. Explain what happens to the equilibrium interest rate. b. How would this policy change affect nominal interest rates in the short run and the long run? Explain your answer using macroeconomic models that we studied in the past semester.