The following graph shows the money market in a hypothetical economy. The central bank in this economy is called the Fed. Assume that the Fed fixesthe quantity of money supplied.Suppose the price level decreases from 90 to 75.Shift the appropriate curve on the graph to show the impact of a decrease in the overall price level on the market for money.Glossary18Money SupplyMoney DemandMoney SupplyNTEREST RATE (Percent)15HiI1:06 PM4/29/2022 omework (Ch 21)INTEREST RATE (Percent)Money SupplyMoney Demand0102030405060MONEY (Billions of dollars)After the decrease in the price level, the quantity of money demanded at the initial interest rate of 9% will bemoney supplied by the Fed at this interest rate. People will try toand other interest-bearing assets, and bond issuers will find that theynew equilibrium at an interest rate of%The following graph shows the economy's aggregate demand curve.30Jthan the quantity ofbondsinterest rates until the money market reaches itstheir money holdings. In order to do so, people will1:07 F4/29/202

The interest rate is the cost of money, according to the Liquidity Preference Theory. Simply put,…

than the quantity of bonds interest rates until the money market reaches its After the decrease in the price level, the quantity of money demanded at the initial interest rate of 9% will be money supplied by the Fed at this interest rate. People will try to and other interest-bearing assets, and bond issuers will find that they new equilibrium at an interest rate of % The following graph shows the economy's aggregate demand curve. their money holdings. In order to do so, people will

than the quantity of bonds interest rates until the money market reaches its After the decrease in the price level, the quantity of money demanded at the initial interest rate of 9% will be money supplied by the Fed at this interest rate. People will try to and other interest-bearing assets, and bond issuers will find that they new equilibrium at an interest rate of % The following graph shows the economy's aggregate demand curve. their money holdings. In order to do so, people will

MACROECONOMICS FOR TODAY

10th Edition

ISBN:9781337613057

Author:Tucker

Publisher:Tucker

Chapter16: Monetary Policy

Section: Chapter Questions

Problem 2SQP

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Q8 Which of the following statements is consistent with a given (i.e., fixed) IS curve? Select one: a. A reduction in the interest rate causes money demand to decrease. b. A reduction in the interest rate causes investment spending to increase. c. An increase in government spending causes an increase in demand for goods. d. A reduction in the interest rate causes an increase in the money supply.
Suppose that expanded credit card availability makes people demand less money at every value of money. a) Using the graph of the money market, show and explain how this change will impact the equilibrium value of money and the equilibrium price level in the economy (do not forget to label the axes). Using the graph of the money market, show and explain the action the Federal Reserve could take to return the economy to its initial price level.
The graph shows an economy's aggregate demand and aggregate supply curves and potential GDP. Does this economy have an inflationary gap or a recessionary gap? How does this economy return to full employment? This economy has _______ gap. It returns to full employment as _______. A. an inflationary; the money wage rate rises B. a recessionary; potential GDP increases C. a recessionary; the money wage rate falls D. an inflationary; aggregate demand decreases
When a consumer withdraws cash from a drawer in his house and deposits it in a savings account, the composition of the money supply immediately changes, and the size of the money supply may eventually alter as well. Demonstrate and explain how this activity may affect the money supply in an economy.
The following graph shows the money market in equilibrium at an interest rate of 6% and a quantity of money equal to $45 billion. Show the impact of the increase in government purchases on the interest rate by shifting one or both of the curves on the following graph.
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. Following the price level increase, the quantity of money demanded at the initial interest rate of 6% will be (greater/less)than the quantity of money supplied by the Fed at this interest rate. As a result, individuals will attempt to (increase/decrease) their money holdings. In order to do so, they will (buy/sell) bonds and other interest-bearing assets, and bond issuers will realize that they (have to offer higher/can offer lower) interest rates until equilibrium is restored in the money market at an interest rate of ______%. The following graph plots the…
The following table shows a money demand schedule, which is the quantity of money demanded at various price levels ( P ).Fill in the Value of Money column in the following table.Price Level (P) Value of Money (1/P) Quantity of Money Demanded (Billions of dollars)1.00 ______ 1.51.33 _______2.02.00 _______3.54.00 _______ 7.0Now consider the relationship between the price level and the quantity of money that people demand. The lower the price level, the money the typical transaction requires, and the money people will wish to hold in the form of currency or demand deposits.Assume that the Fed initially fixes the quantity of money supplied at $3.5 billion.Use the orange line (square symbol) to plot the initial money supply ( MS1 ) set by the Fed. Then, referring to the previous table, use the blue connected points (circle symbol) to graph the money demand curve.
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 decreases from 90 to 75. Shift the appropriate curve on the graph to show the impact of a decrease in the overall price level on the market for money. Following the price level decrease, the quantity of money demanded at the initial interest rate of 6% will be (greater/less) than the quantity of money supplied by the Fed at this interest rate. As a result, individuals will attempt to (increase/decrease) their money holdings. In order to do so, they will (buy/sell) bonds and other interest-bearing assets, and bond issuers will realize that they (have to offer higher/can offer lower) interest rates until equilibrium is restored in the money market at an interest rate of________% The following graph plots the…
According to Keynes, which of the following information about the money market is wrong?A) The cost of giving up liquidity is interest.B) The money supply graph is steep.C) The equilibrium interest rate drops as a result of the expansive money supply.D) When the interest rate is above the equilibrium interest rate, a money supply surplus occurs in the economy.E) There is an inverse relationship between money demand and income.
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 150 to 175.
The above figure has the demand for money curve. Suppose the Fed initially sets the quantity of money equal to $0.6 trillion. Draw the supply of money curve in the figure. What is the equilibrium interest rate? Now suppose the Fed increases the quantity of money to $0.9 trillion. Draw the new supply curve. What is the new equilibrium interest rate? If the Fed sells $100 million of U.S. government securities, what happens to the quantity of money?
Explain how an increase in government expenditure can affect the goods market and moneymarket by taking the link between the two markets into account.