EBK MACROECONOMICS
10th Edition
ISBN: 9780134896571
Author: CROUSHORE
Publisher: VST
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Question
Chapter 9, Problem 4RQ
To determine
The effect on the real interest rate with regard to the asset market provided that the real money supply surpasses the quantity of money demanded for a constant level of output.
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- Consider the money market in the accompanying graph. Initially, the equilibrium interest rate and quantity are represented by the point, El. Suppose the central bank reduces the money supply. Adjust the graph of the money market to illustrate this change and label the new equilibrium by moving the point, E2. After this recent change in the money supply, what is true about the point E1? The quantity of money demanded is more than the quantity of money supplied. The quantity of money demanded is less than the quantity of money supplied. The quantity of money supplied is more than the quantity of money demanded. Those selling interest-bearing nonmonetary assets will face market pressure to lower their interest rates. Interest rate (%) Incorrect 10 9 8 7 6 5 4 3 2 1 0 0 1 2 E2 Money Market EI 3 4 5 6 Quantity of money 7 8 MS MD 9 10arrow_forwardAccording to the interest rate effect, when the price falls, the interest rate Orises and the quantity of real GDP demanded increases. is not affected. Orises and the quantity of real GDP demanded decreases. Ofalls and the quantity of real GDP demanded increases.arrow_forwardSuppose John Smith signs up to a fixed- interest mortgage. Then there is some unexpected inflation and following this John Smith spends less on consumption (in real terms). For simplicity, note that his wages have been indexed for inflation so that his real take-home wage has remained constant. Explain this fall in consumption.arrow_forward
- Consider the market for loanable funds. Suppose the demand for loans is given be i=9-Q+π, and the supply of loans is given by i=Q/2+π, where π represents inflation. Now suppose that π=5 (instead of 3, in the previous problem). What is the equilbrium quantity of loans and what is the corresponsing interest rate? Q*=8, i*=6 Q*=3, i*=6 Q*=6, i*=8 Q*=6, i*=6arrow_forwardAnswer 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.arrow_forwardWhat is the impact of a decrease in the money supply on the interest rate, income, consumption, and investment? (need a Macroeconomics way of answer)arrow_forward
- Consider an economy described by the following equations:Y = C + I + GY = 5,000G = 1,000T = 1,000C = 250 + 0.75(Y −T )I = 1,000 − 50 r. a)Find the new equilibrium interest ratearrow_forwardConsider an economy described by the following equations:Y = C + I + GY = 5,000G = 1,000T = 1,000C = 250 + 0.75(Y −T )I = 1,000 − 50 r. a) find the equilibrium interest ratearrow_forwardSuppose that when everyone wakes up tomorrow, they discover that the government has given them an additional amount of money equal to the amount they already had. Explain what effect this doubling of the money supply will likely have on the following: the total amount spent on goods and services the quantity of goods and services purchased if prices are sticky the prices of goods and services if prices can adjustarrow_forward
- The negative relationship between the demand for investment goods and the real interest rate is determined by the fact that more investment reduces the future depreciation. more investment reduces the marginal product of future capital. more investment increases the total supply for current goods. more investment increases the total demand for current goods. None of the other answers is correct.arrow_forwardRefer to Figure 11.1. The movement from C to B could be cause by Group of answer choices an increase in the interest rate. a decrease in the interest rate. a decrease in income. an increase in nominal output.arrow_forwardWhich of the following statements are true, which are false? If an increase in the real interest rate leads to a higher level of consumption in both periods, this can be explained through (a) substitution effect of the real interest rate change; (b) income effect of the real interest rate change.arrow_forward
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