[Solution]Motives of Money Demand

1. State ‘True’ or ‘False’ and explain why. (Full credit is given if the explanation is correct) a. A central bank can maintain fixed exchange…

1. State ‘True’ or ‘False’ and explain why. (Full credit is given if the explanation is correct)
a. A central bank can maintain fixed exchange rate while targeting inflation.
b. US Federal Reserve system has a hierarchical mandate on achieving its goals.
c. US Federal Reserve targets headline inflation
d. US Federal reserve follows a monetary policy rule
e. Time Inconsistency problem occurs when a central bank uses discretionary policy.
 
2.
a. What are three motives of money demand according to Keynes?
b. What is equation linking velocity and demand for money according to Keynesian Approach?
c. What is the impact on velocity as a result of
i. Economy goes in to a recession
ii. Credit cards are made illegal
iii. Interest rate rises
Hint: First check what happens to the demand for money, and then use the equation : V = Y/f(i,Y)
 
 

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