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In Exhibit 12, when the money supply increases from MS 1 to MS 2 the equilibrium interest rate a. remains unchanged. b. increases from i 2 to i 1 , increasing investment spending from I 1 to I 1 . c. increases from i 2 to i 1 , decreasing investment spending from I 2 to I 1 . d. decreases from i 1 to i 2 , increasing investment spending from I 1 to I 2 .

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Economics For Today

10th Edition
Tucker
Publisher: Cengage Learning
ISBN: 9781337613040

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BuyFindarrow_forward

Economics For Today

10th Edition
Tucker
Publisher: Cengage Learning
ISBN: 9781337613040
Chapter 26, Problem 10SQ
Textbook Problem
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In Exhibit 12, when the money supply increases from MS1 to MS2 the equilibrium interest rate

  1. a. remains unchanged.
  2. b. increases from i2 to i1, increasing investment spending from I1 to I1.
  3. c. increases from i2 to i1, decreasing investment spending from I2 to I1.
  4. d. decreases from i1 to i2, increasing investment spending from I1 to I2.

Chapter 26, Problem 10SQ, In Exhibit 12, when the money supply increases from MS1 to MS2 the equilibrium interest rate a.

To determine

The impact on the equilibrium interest rate due to shift in the money supply.

Explanation of Solution

Money is anything that serves as a medium of exchange in the market, unit of account, and the store of value in the economy. There are many forms of money such as paper currencies, metallic coins, bills, and so forth. There are mainly three demands for money and they are speculative demand for money, precautionary demand for money, and transaction demand for money. The economic condition is illustrated as follows:

Option (d):

From the given diagram, it is identified that the money supply in the economy increases from MS1 to MS2, which is illustrated with a rightward shift in the money supply curve. As the money supply increases, the rate of interest in the economy decreases from i1 to i2. Since the relationship between the rate of interest and the investment increases, the fall in the rate of interest leads to an increase in the investment from i1 to i2. Thus, option 'd' is the correct answer.

Option (a):

The increase in the money supply in the economy leads to lower interest rate. This is because the increased supply of money reduces the scarcity of money, which decreases the rate of interest...

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Chapter 26 Solutions

Economics For Today
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Ch. 26.A - Assume the economy is operating at a real GDP...Ch. 26.A - Assume the economy is experiencing an inflationary...Ch. 26.A - Assume the economy is in short-run equilibrium at...Ch. 26.A - A policy to do nothing and allow the economy to...Ch. 26.A - Assume the economy is experiencing a recessionary...Ch. 26.A - Assuming the economy is in a recession, Keynesian...Ch. 26.A - Assume the economy is in short-run equilibrium at...Ch. 26.A - Assume the economy is experiencing an inflationary...Ch. 26.A - In part (a) of Exhibit A-3, the economy is...Ch. 26.A - Assume that the economy depicted in part (a) of...Ch. 26.A - In part (b) of Exhibit A-3, the economy is...Ch. 26.A - Assume that the economy depicted in part (b) of...Ch. 26 - How much money do you keep in cash or checkable...Ch. 26 - What are the basic motives for the transactions...Ch. 26 - Suppose a bond pays annual interest of 80. Compute...Ch. 26 - Using the demand and supply schedule for money...Ch. 26 - Assume you are the chair of the Federal Reserve...Ch. 26 - A monetarist investigator might say that the sewer...Ch. 26 - What is the quantity theory of money, and what...Ch. 26 - Exhibit 6 shows the monetarist monetary policy...Ch. 26 - Explain the difference between the Keynesian and...Ch. 26 - Based on the quantity theory of money, what would...Ch. 26 - Suppose the investment demand curve is a vertical...Ch. 26 - Why is the shape of the aggregate supply curve...Ch. 26 - The demand for money that households keep for...Ch. 26 - The quantity of money held in response to interest...Ch. 26 - The speculative demand for money a. varies...Ch. 26 - Other things being equal, the quantity of money...Ch. 26 - A decrease in the interest rate, other things...Ch. 26 - Which of the following statements is true? a. The...Ch. 26 - In Exhibit 11, assume an equilibrium with an...Ch. 26 - According to Keynesians, an increase in the money...Ch. 26 - While the classicists believed that both velocity...Ch. 26 - In Exhibit 12, when the money supply increases...Ch. 26 - In Exhibit 12, if the interest rate falls from i1...Ch. 26 - In Exhibit 12, a shift in aggregate demand from...Ch. 26 - The monetarist transmission mechanism through...Ch. 26 - The equation of exchange states a. MV = PQ. b. MP...Ch. 26 - The quantity theory of money assumes that the...Ch. 26 - The transactions demand for money is the demand...Ch. 26 - People react to an excess supply of money by a....Ch. 26 - The belief that the velocity of money is not...Ch. 26 - The monetary rule is the view of the a. Keynesians...Ch. 26 - Which of the following statements is true? a....

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