Question: 1. Compare the cost minimization and the profit maximization approaches to the derivation of the transactions demand for money. What insights do we get for the transactions money demand from using the profit maximization approach that are not apparent from
the cost minimization approach?

2. In the economy of Country x, the commercial banks have deposits of $600 billion. Their reserves are $60 billion. All reserves are in deposits with the Central Bank and the commercial banks hold no excess reserves. There is $120 billion in Central Bank notes outside the banks, and there are no coins.

a) What is the economy's monetary base?

b) What is the quantity of money in the economy?

c) Calculate the money multiplier.

d) Suppose the Central Bank of Country X undertakes an open market purchase of securities of so that the monetary base increases by $5 billion. By how much will the quantity of money change? ECN 5442 Monetary Economics

3. Show what happens to the monetary base and money supply if the central bank

a. lowers the discount rate

b. sells bonds to the public

c. the economy enters a boom and interest rates rise

4. Note that recessions seem to be caused by either reduction in aggregate demand or in aggregate supply, or by the two acting in concert. What targets should the central bank adopt? Would the optimal choice of the target be the same for reductions in aggregate
supply as for reductions in aggregate demand?

5. Greenland is a country in which the quantity theory of money operates. The country has a constant population, capital stock, and technology so real GDP does not change. In 2010, real GDP was $500 million, the price level, measured by the GDP deflator, was 150 and the velocity of circulation of money was 10. (Because the price level is measured by the GDP deflator, it must be divided by 100 before it is used in the equation of exchange.) In 2011, the quantity of money increased by 20 percent.

a) What was the quantity of money in 2010?

b) What was the velocity of circulation in 2011?

c) What was the price level in 2010?