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2. The theory of liquidity preference and the downward-sloping aggregate 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 increases from 120 to 140. 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) 0 0 10 Money Supply 20 30 40 MONEY (Billions of dollars) MD1 MD2 50 60 Money Demand The following graph plots the aggregate demand curve for this economy. Money Supply (?) than the quantity of money Following the price level increase, the quantity of money demanded at the initial interest rate of 3% will be greater supplied by the Fed at this interest rate. As a result, individuals will attempt to increase their money holdings. In order to do so, they will sell bonds and other interest-bearing assets, and bond issuers will realize that they have to offer higher interest rates until equilibrium is restored in the money market at an interest rate of 4%.

2. The theory of liquidity preference and the downward-sloping aggregate 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 increases from 120 to 140. 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) 0 0 10 Money Supply 20 30 40 MONEY (Billions of dollars) MD1 MD2 50 60 Money Demand The following graph plots the aggregate demand curve for this economy. Money Supply (?) than the quantity of money Following the price level increase, the quantity of money demanded at the initial interest rate of 3% will be greater supplied by the Fed at this interest rate. As a result, individuals will attempt to increase their money holdings. In order to do so, they will sell bonds and other interest-bearing assets, and bond issuers will realize that they have to offer higher interest rates until equilibrium is restored in the money market at an interest rate of 4%.

Brief Principles of Macroeconomics (MindTap Course List)
Brief Principles of Macroeconomics (MindTap Course List)
8th Edition
ISBN:9781337091985
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter16: The Influence Of Monetary And Fiscal Policy On Aggregate Demand
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2. The theory of liquidity preference and the downward-sloping aggregate 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 increases from 120 to 140. 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) 6 5 3 N 0 0 10 Money Supply 20 30 40 MONEY (Billions of dollars) MD1 MD2 50 60 Money Demand The following graph plots the aggregate demand curve for this economy. Money Supply (?) than the quantity of money Following the price level increase, the quantity of money demanded at the initial interest rate of 3% will be greater supplied by the Fed at this interest rate. As a result, individuals will attempt to increase their money holdings. In order to do so, they will sell bonds and other interest-bearing assets, and bond issuers will realize that they have to offer higher restored in the money market at an interest rate of interest rates until equilibrium is 4%.
Transcribed Image Text:2. The theory of liquidity preference and the downward-sloping aggregate 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 increases from 120 to 140. 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) 6 5 3 N 0 0 10 Money Supply 20 30 40 MONEY (Billions of dollars) MD1 MD2 50 60 Money Demand The following graph plots the aggregate demand curve for this economy. Money Supply (?) than the quantity of money Following the price level increase, the quantity of money demanded at the initial interest rate of 3% will be greater supplied by the Fed at this interest rate. As a result, individuals will attempt to increase their money holdings. In order to do so, they will sell bonds and other interest-bearing assets, and bond issuers will realize that they have to offer higher restored in the money market at an interest rate of interest rates until equilibrium is 4%.
Show the impact of the increase in the price level by moving the point along the curve or shifting the curve. PRICE LEVEL 240 200 160 120 80 40 0 0 20 Aggregate Demand 40 60 80 OUTPUT (Billions of dollars) 100 120 Aggregate Demand The change in the interest rate found in the previous task will lead to a fall a decrease in the quantity of output demanded in the economy. (?) in residential and business spending, which will cause
Transcribed Image Text:Show the impact of the increase in the price level by moving the point along the curve or shifting the curve. PRICE LEVEL 240 200 160 120 80 40 0 0 20 Aggregate Demand 40 60 80 OUTPUT (Billions of dollars) 100 120 Aggregate Demand The change in the interest rate found in the previous task will lead to a fall a decrease in the quantity of output demanded in the economy. (?) in residential and business spending, which will cause
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