Use the following information: Goods Market: I=120-400r Money Market: Ms=245/P where / means divide by Y=500...

Use the following information:

Goods Market: I=120-400r Money Market: Ms=245/P where / means divide by

Y=500 Md=(1/2)Y-100r

P=1

a) Draw graphically and calculate the equilibrium values for the asset market. What is the current investment level? b) Suppose that the Federal Reserve conducts an open market purchase of 20 units. Draw graphically and calculate the equilibrium values for the asset market. What is the current investment level? c) Instead of an open market purchase suppose that there is increased risk in the financial markets changing money demand by 50 units (either add or subtract 50 from the money demand equation). Show graphically and calculate all the steady state values for the asset market. What is the current investment level? d) Suppose that the risk happened. If the Fed wanted to stabilize the economy (prevent investment from changing) what would the Fed do? How large would this policy have to be? Show this all graphically.

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Expert Solution

Rahul Sunny answered 1 year ago

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