Intermediate Macroeconomics Problem Set

Intermediate Macroeconomics Problem Set
Econ 202: Intermediate Macroeconomics Problem Set 4: The money market model and non-traditional monetary policy
Spring 2023 Due date: This assignment is due via Blackboard by 12:30 pm on Thursday February 23. Instructions: For full credit, you need to show all steps and work, clearly label all graphs, and fully explain any answers that ask for an explanation. You can either type your answers (but be sure to still show all steps and work) or write them by hand and scan them using the camera on your phone/tablet (this is what I would do). Question 1: Bond prices and interest rates (10 points) Consider a bond that promises to pay $100 in one year.
a. What is the equilibrium interest rate on the bond if its price today is $85? $95? b. Explain why there is an inverse relationship between bond prices and interest rates.
(Explain the economic logic, not only the mechanics of the formula). c. If the interest rate is 4%, what is the price of the bond today?
Question 2: Monetary policy in a liquidity trap (10 points) Consider the following graph of a money market and answer the following questions: 𝑖 𝑀!
” 𝑀