1) What is a liquidity preference framework? - Which factor will cause a shift in demand for money, and which is directi

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1) What is a liquidity preference framework?
- Which factor will cause a shift in demand for money, and which is direction of the shift?
​e.g., An increase in Factor A cause the demand for moneyto shift to the right.
- Which factor will cause shifts in supply of money, and which is direction of the shift?
​e.g., An increase in Factor A cause the supply for money to shift to the right.
- Please graphically explain how the interest rate will change in response to a decrease in Money supply using the liquidity preference framework.
2. Please illustrate the following process using a T-account.
- Situation A: Let’s say that Jane Brown has heard that the First National Bank provides excellent service, so she opens a checking account with a $200 bill. Please show its T-account.
- Situation B1: As you know, the bank is obliged to keep a certain fraction of its checkable deposits as required reserves. If the fraction (the required reserve ratio) is 10% and the excess reserves the bank holds is $180. Please rewrite its T-account.
- Situation B2: Suppose the banks wants to hold the $180 as Loans (not excess reserves). Please rewrite its T-account. Which one is more profitable, Situation B1 or Situation B2, why?
3. A lottery claims its grand prize is $5 million, payable over 5 years at $1,000,000 per year. If the first payment is made immediately, what is this grand prize really worth? Use an interest rate of 2%.