Suppose the money market for some hypothetical economy is given by the following graph, which plots the money demand and money supply curves. Assume the central bank in this economy (the Fed) fixes the quantity of money supplied. Suppose the price level increases from 90 to 105. Shift the appropriate curve on the graph to show the impact of an increase in the overall price level on the market for money. 18 15 INTEREST RATE (Percent) 10 0 20 Money Supply Money Demand 40 60 80 MONEY (Billions of dollars) 100 120 Money Demand 0- Money Supply Following the price level increase, the quantity of money demanded at the initial interest rate of 9% will be supplied by the Fed at this interest rate. As a result, individuals will attempt to bonds and other interest-bearing assets, and bond issuers will realize that they restored in the money market at an interest rate of than the quantity of money their money holdings. In order to do so, they will interest rates until equilibrium is
Suppose the money market for some hypothetical economy is given by the following graph, which plots the money demand and money supply curves. Assume the central bank in this economy (the Fed) fixes the quantity of money supplied. Suppose the price level increases from 90 to 105. Shift the appropriate curve on the graph to show the impact of an increase in the overall price level on the market for money. 18 15 INTEREST RATE (Percent) 10 0 20 Money Supply Money Demand 40 60 80 MONEY (Billions of dollars) 100 120 Money Demand 0- Money Supply Following the price level increase, the quantity of money demanded at the initial interest rate of 9% will be supplied by the Fed at this interest rate. As a result, individuals will attempt to bonds and other interest-bearing assets, and bond issuers will realize that they restored in the money market at an interest rate of than the quantity of money their money holdings. In order to do so, they will interest rates until equilibrium is
Chapter16: Monetary Policy
Section: Chapter Questions
Problem 8SQ
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2. The theory of liquidity preference and the downward-slopingaggregate demand curve.
Transcribed Image Text:Following the price level increase, the quantity of money demanded at the initial interest rate of 9% will be
than the quantity of money
supplied by the Fed at this interest rate. As a result, individuals will attempt to
their money holdings. In order to do so, they will
interest rates until equilibrium is
bonds and other interest-bearing assets, and bond issuers will realize that they
restored in the money market at an interest rate of
%
The following graph plots the aggregate demand curve for this economy.
Show the impact of the increase in the price level by moving the point along the curve or shifting the curve.
PRICE LEVEL
180
150
120
8
8
8
1
B
U
Aggregate Demand
80
120
160
OUTPUT (Billions of dollars)
200
The change in the interest rate found in the previous task will lead to a
in the quantity of output demanded in the economy.
Aggregate Demand
in residential and business spending, which will cause
Transcribed Image Text:Suppose the money market for some hypothetical economy is given by the following graph, which plots the money demand and money supply curves.
Assume the central bank in this economy (the Fed) fixes the quantity of money supplied.
Suppose the price level increases from 90 to 105.
Shift the appropriate curve on the graph to show the impact of an increase in the overall price level on the market for money.
INTEREST RATE (Percent)
18
3₁
15
12
a
3
0
0
20
Money Supply
Money Demand
40
60
80
MONEY (Billions of dollars)
100
120
O
Money Demand
---
Money Supply
Following the price level increase, the quantity of money demanded at the initial interest rate of 9% will be
supplied by the Fed at this interest rate. As a result, individuals will attempt to
bonds and other interest-bearing assets, and bond issuers will realize that they
restored in the money market at an interest rate of
%
than the quantity of money
their money holdings. In order to do so, they will
interest rates until equilibrium is
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