The following graph shows the money market in equilibrium at an interest rate of 3% and a quantity of money equal to $15 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. 6 Money Supply 5 Money Demand Money Supply Money Demand 1 5 10 15 20 25 30 MONEY (Billions of dollars) INTEREST RATE
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- 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.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.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.
- Answer the question based on the following information: For transactions, households and businesses want to hold an amount of money equal to one-half of nominal GDP. The table shows the amounts of money they want to hold as an asset at various interest rates. If nominal GDP is $300 and the supply of money is $250, the equilibrium interest rate will be Interest Rate Amount of Money Demanded as an Asset 10% $20 8 40 6 60 4 80 2 100 Multiple Choice 4 percent. 10 percent. 6 percent. 8 percent. 2 percent.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.The following diagram represents the equilibrium in the money market. Explain the following question with the help of the graph ( in the picture ): a) What is the equilibrium level of interest rate and quantity of money demanded and supplied? b) What would happen in the money market if the market prevailing interest rate is 8? Describe the adjustment mechanism? c) How price level affects the money demand curve? How could you reflect this change diagrammatically? d) Why the Money supply curve is vertical and independent of the interest rate? Explain? e) Suppose central bank of Bangladesh decided to use open market sale of securities. How does it affect the money supply of the economy? Explain with graph?
- Money supply, money demand, and adjustment to monetary equilibrium 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 0.50 / 1.00/2.00 1.5 1.33 0.67 / 0.75 / 1.33 / 2.66 2.0 2.00 0.50 / 1.00/2.00/4.00 3.5 4.00 0.25 / 2.00/4.00/8.00 7.0 Now consider the relationship between the price level and the quantity of money that people demand. The lower the price level, the ___More/Less___money the typical transaction requires, and the___More/Less___money people will wish to hold in the form of currency or demand deposits. According to your graph, the equilibrium value of money is__0.25 / 0.50 /0.75 /1.00__ , therefore the equilibrium price level is __1.00 / 1.33 / 2.00 / 4.00__ . Now, suppose that the Fed increases…Equilibrium in the money market occurs when Select one: a. the transactions demand for money equals the precautionary demand for money. b. the quantity of money demanded is more than the quantity of money supplied in the economy. c. the quantity of money demanded equals the quantity of money supplied in the economy. d. the quantity of money demanded is less than the quantity of money supplied in the economy.The following table shows a money demand schedule, which is the quantity of money demanded at various price levels (PP). Fill in the Value of Money column in the following table. Price Level (P) Value of Money (1/P) Quantity of Money Demanded 1.00 1.5 1.33 2.0 2.00 3.5 4.00 7.0 Now consider the relationship between the price level and the quantity of money that people demand. The lower the price level, the (a. more, b. less) money the typical transaction requires, and the (a. more, b. less) 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. (Graph in image) According to your graph, the equilibrium value of…
- #16 [MUST SHOW WORK] Suppose the Bank of Canada uses open market operations to raise the overnight rate. As a result the _____________. (Draw a graph to show your work.) Select one: A. demand for money decreases B. quantity of money supplied increases C. demand for money increases D. supply of money decreases E. supply of money increasesSuppose 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…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.
