Homework #4
Due Thursday 11/03
1. Explain the shape of the reserve demand curve. (b) Explain the shape of the reserve supply curve.
2. Use reserve supply and demand diagrams to show how (a) open market operations, (b) borrowing from the Fed, and (c) changes in reserve requirements impact the federal funds rate.
3. Show graphically how an increase in financial market risk affects the federal funds rate, and how the Fed would respond in order to return the federal funds rate to its target value.
4. What is the money demand function in the classical model? How does the money demand function differ under the Cambridge approach? Why is this important?
5. Explain the speculative motive for holding money in Keynes liquidity preference theory and why, in aggregate, it is negatively related to the interest rate.
6. Explain why the money demand curve slopes downward. Show how the money demand curve shifts when income increases. How does the money demand curve shift if there is an increase in the riskiness of financial assets? Explain.
7. What did Tobin add to Keynes theory of the speculative demand for money? Why was this development important?
