1 Economics 211 Due Thursday, March 5, 2020 Spring Semester Professor John Duca Homework #2 (NOTE: Assignments to be handwritten except for approved disabilities or approved circumstances. Assignments are to be turned in by the BEGINNING of class on the due date or into my mailbox in the Economics Department (223 Rice Hall) by the beginning of class on the due date. WHERE YOU CAN, SHOW THE FORMULAS THAT YOU ARE USING AND ANY RELEVANT CALCULATIONS. 1) Using the more complicated 2-axis, supply and demand framework for bonds presented in class (bond prices on the left y-axis, and INVERTED interest rates on the right y-axis), illustrate an initial equilibrium and then show which curve will likely shift (or curves shift) (if any) in response to the following changes in market conditions. In each case, state what happens to the bond price and what happens to the interest rate (up, down, or unchanged) (20 points). Use separate diagrams for (a) and for (b). a) There is a fall in expected inflation. b) There is a business cycle expansion in a non-U.S. economy. 2) Using the supply and demand framework for money presented in chapter 5 of the Mishkin text, illustrate what happens to the equilibrium quantity of money held and interest rates if the following events occurred. In each case, assume that there are no income, price level, or expected inflation effects—that is only consider the initial liquidity effects: (10 points) a) The risk of currency fraud rises so that currency has become less accepted as a means of payment by many firms or entail much longer delays to verify that the currency is not counterfeit. Illustrate what happens to the demand for money. Illustrate what happens if, in response, the Federal Reserve alters the supply of money so that bond prices (and thus interest rates) are unchanged. b) There is a large change in expectations such that people see stocks as a much more attractive investment. As a result, people shift toward stocks and away from money market mutual funds and savings deposits. Illustrate what happens if, in response, the Federal Reserve alters the supply of broadly defined money (that is, M2) so that bond prices (and thus interest rates) are unchanged. 2 3) Suppose a central bank wants to stimulate the economy by lowering interest rates through expanding the money supply under the following conditions. Illustrate how interest rates change over time using the appropriate framework from the appropriate section of Mishkin’s textbook (this was covered in class). Clearly indicate when the monetary action occurs, and label which type or types of effects on interest rates are occurring at different times. (15 points)USE SEPARATE DIAGRAMS for 3a & 3b a) Suppose that you are in a country that has a great reputation for stabilizing long- run inflation. Suppose that in response to slowing aggregate demand, the central bank.