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An economy begins in long-run equilibrium, and then bank deposit rate. Recall that the money stock is the sum of cur demand deposits. a) How does this change affect the demand for money ane b) If the central bank keeps the money supply constant, w-

An economy begins in long-run equilibrium, and then bank deposit rate. Recall that the money stock is the sum of cur demand deposits. a) How does this change affect the demand for money ane b) If the central bank keeps the money supply constant, w-

Algebra and Trigonometry (MindTap Course List)
Algebra and Trigonometry (MindTap Course List)
4th Edition
ISBN:9781305071742
Author:James Stewart, Lothar Redlin, Saleem Watson
Publisher:James Stewart, Lothar Redlin, Saleem Watson
Chapter10: Systems Of Equations And Inequalities
Section10.FOM: Focus On Modeling: Linear Programming
Problem 14P
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Problem 1 An economy begins in long-run equilibrium, and then banks reduce deposit rate. Recall that the money stock is the sum of currency and demand deposits. a) How does this change affect the demand for money and velocity? b) If the central bank keeps the money supply constant, what will happen to output and prices in the short run and in the long run? c) If the goal of the central bank is to stabilize the price level, should the bank keep the money supply constant in response to this reduction? If not, what should it do? Why? d) If the goal of the central bank is to stabilize output, how would your answer to part (c) change? Use the AD-AS model.
Transcribed Image Text:Problem 1 An economy begins in long-run equilibrium, and then banks reduce deposit rate. Recall that the money stock is the sum of currency and demand deposits. a) How does this change affect the demand for money and velocity? b) If the central bank keeps the money supply constant, what will happen to output and prices in the short run and in the long run? c) If the goal of the central bank is to stabilize the price level, should the bank keep the money supply constant in response to this reduction? If not, what should it do? Why? d) If the goal of the central bank is to stabilize output, how would your answer to part (c) change? Use the AD-AS model.
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