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.

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.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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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: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curve shifts; and v. the terminal equilibrium values. Explain what happens to the equilibrium interest rate.
4. One of the potential problems for a bank is high rates of loan default. This is a scenario when loan receivers cannot pay back what they owe to the bank. To reduce this kind of risk, a bank can hold a greater share of government bonds or reserves instead of loans as assets in its balance sheet. 4.a) Explain how this can change the asset side of the balance sheet? Would this make the balance sheet imbalanced? 4.b) What is the implication of this change for the GDP in the short- run? Explain in an AS/AD graph.
12. what factors motivate the central bank to require tge two selected Dls to hold minimum amounys of liquid assets?
a. Suppose a certain bank has $5M in capital, demand deposits totaling $40M, holds 15% reserves, and invests solely in high-risk loans. Sketch out this bank’s balance sheet.b. Now suppose that 10% of the loans completely default. What does this bank’s balance sheet look like? Hold demand deposits constant for this question.c. Finally, assume depositors, fearing insolvency, withdraw $15M from the bank. The bank can sell loans only at a 25% discount. Barring any inter-bank borrowing, does this bank remain solvent? Why or why not?
5) Suppose a computer virus disables the nation’s automatic teller machines , making withdrawals from bank accounts less convenient .As a result, people want to keep more cash on hand ,increasing the demand for money. a) Assume the Fed does not change the money supply . According to the theory of liquidity preference,what happens to the interest rate? What happens to aggregate demand. b) If instead the Fed wants to stabilize aggregate demand, how should it change the money supply? C) If its want to accomplish this change in the money supply using open-market operations,what should it do?
1. Suppose that the Fed makes an open market purchase of $200,000 in bonds from QRS Bank. a. Show how this affects the Fed balance sheet. b. Show how this affects the balance sheet of QRS Bank. c. Assume that QRS Bank lends out as much as it can, based on this changed situation. What does its balance sheet look like after it makes the loans? d. Assume that all the proceeds from those loans are deposited in TUV Bank. What is the effect on TUV Bank's balance sheet? e. Assume that the required reserve ratio is 10 percent. What new opportunity does TUV Bank now face? What is it likely to do?
1. Explain what happens to the money supply, interest rates, investment spending and GDP when the Fed makes open market bond purchases. 2. Use the money demand and money supply model to show graphically and explain the effect on interest rates of the Federal Reserve’s open market purchase of Treasury securities.
51) What is the impact on interest rates when the Federal Reserve decreases the money supply by selling bonds to the public? 52) Use demand and supply analysis to explain why an expectation of Fed rate hikes would cause Treasury prices to fall. 5.4 Supply and Demand in the Market for Money: The Liquidity Preference Framework 1) In Keynes's liquidity preference framework, individuals are assumed to hold their wealth intwo forms: A) real assets and financial assets. B) stocks and bonds. C) money and bonds. D) money and gold. 2) In Keynes's liquidity preference framework, A) the demand for bonds must equal the supply of money. B) the demand for money must equal the supply of bonds. C) an excess demand of bonds implies an excess demand for money. D) an excess supply of bonds implies an excess demand for money. 3) In Keynes's liquidity preference framework, if there is excess demand for money, there is…
Use the theory of liquidity preference to predict the impact of the following on the real interest rate. Use diagrams and explain your intuition. 1. A decrease in the money supply 2. An increase in income 3. An increase in transaction costs associated with purchasing stocks and bonds
)The central bank of your assigned Caribbean country decides to pursue anexpansionary monetary policy.(i) Identify one possible action they could take. (ii) Carefully explain, in as much detail as possible, how the chosen action will impact the money market. (iii) Illustrate the overall impact of the chosen action on the money market.(iv) Identify a newspaper article in your assigned Caribbean country thatprovides a situation in which an expansionary monetary policy wasimplemented by the central bank. Ensure that you provide a screenshot of the article in your submission.
If Central Bank buys security bills in the open market; then what happens to equilibrium interest and equilibrium output under the following conditions?Sketch graph for each condition and explain your answer. a) When interest elasticity of investment is low b) When interest elasticity of investment is high c) When interest elasticity of investment is zero
9. If the demand for reserves did not fluctuate, the Fed could pursue both a reservestarget and an interest-rate target at the same time.” Is this statement true, false, oruncertain? Explain.