ANALYTICAL PROBLEMS

1. What happens to Ml and M2 due to each of the follow­ing changes?

a. You take $500 out of your checking account and put it into a passbook savings account.

b. You take $1000 out of your checking account and buy traveler's checks.

c. You take $1500 out of your money-market mutual fund and deposit it into your checking account.

d. You cash in $2000 in savings bonds and invest the money in a certificate of deposit.

2. Figure 7.2 shows that, before the 1990s, M2 velocity generally rose over time. Suggest some explanations for this upward trend.

3. The prisoner-of-war camp described by Radford (“In Touch with Data and Research: Money in a Prisoner-of-War Camp") periodically received large shipments of cigarettes from the Red Cross or other sources.

a. How did cigarette shipments affect the price level (the prices of goods in terms of cigarettes) in the POW camp?

b. (More difficult) On some occasions the prisoners knew in advance when the cigarette shipments were to arrive. What happened to the demand for cigarette money and the price level in the camp in the days just before an anticipated shipment?

4. Assume that prices and wages adjust rapidly so that the markets for labor, goods, and assets are always in equilibrium. What are the effects of each of the fol­lowing on output, the real interest rate, and the cur­rent price level?

a. A temporary increase in government purchases.

b. A reduction in expected inflation.

c. A temporary increase in labor supply.

d. An increase in the interest rate paid on money.

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