Finance 462

Problem Set #7

1)      Explain how each of the following events would affect money demand.

a)      An increase in GDP.

b)      The increased availability of credit cards.

c)      A drop in the nominal interest rate.

2)      Currently, nominal GDP in the US is around $12T.  The M1 money supply is around $1.5T while the M2 money supply is around $6T. 

a)      What is the difference between M1 and M2 money supply?

b)      Calculate the velocity for M1 and M2 money

c)      In recent years, the velocity of M1 has been rising while the velocity of M2 has been falling.  Why is this?

3)      Explain how each of the following policy actions would influence the monetary base as well as the other broader monetary aggregates.

a)      An open market sale of $10M in US Treasuries

b)      A $2.5M discount window loan.

c)      An increase in the reserve requirement

4)      Suppose that the cash to deposits ratio is .2 and the reserve requirement is 10% and banks hold no excess reserves. What would be the impact on M1 of a purchase of $100 million dollars in securities by the Federal Reserve Bank? How would your answer change if the cash to deposits ratio fell to .05?

5) What is the difference between discount window loans and federal funds loans?