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9. With the Second MD Curve, would the Central Bank need to change the Money Supply by more or less than it would with the First MD Curve if it wanted to close this inflationary gap? Explain your answer.

9. With the Second MD Curve, would the Central Bank need to change the Money Supply by more or less than it would with the First MD Curve if it wanted to close this inflationary gap? Explain your answer.

Macroeconomics: Private and Public Choice (MindTap Course List)
Macroeconomics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN:9781305506756
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Chapter13: Money And The Banking System
Section: Chapter Questions
Problem 8CQ
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answer only question 9 pls

9. With the Second MD Curve, would the Central Bank need to change the Money Supply by more or less than it would with the First MD Curve if it wanted to close this inflationary gap? Explain your answer. 10. Which of the two curves would Keynesians believe is more likely to be the case? Which is more in line with the monetarist point of view? Explain your answer.
Transcribed Image Text:9. With the Second MD Curve, would the Central Bank need to change the Money Supply by more or less than it would with the First MD Curve if it wanted to close this inflationary gap? Explain your answer. 10. Which of the two curves would Keynesians believe is more likely to be the case? Which is more in line with the monetarist point of view? Explain your answer.
Now suppose that the Central Bank has set the current Money Supply to be equal to $8,000. This Money Supply is currently made up of $2,000 of printed currency, and $6,000 of Bank Deposits. The current mandated reserve ratio is 10%. The Demand for Money (MD) as a function of the interest rate ("i") is given by: 1 MD = 20,000 – 1,000i 5. Draw the MS and MD curves in a single figure. Label all x-intercepts and y-intercepts. Where is the equilibrium in the money market? Given this, what is the current prevailing market interest rate (i*)? Now suppose that there is an increase in autonomous consumption of 180. 6. What will be the new short-run equilibrium Real GDP in this case? Are we in an inflationary gap or output gap now? How large is it? Show your work. Finally, suppose that for every 1% decrease in the interest rate, Desired Consumption will increase by $25 and Desired Investment will increase by $25. The Central Bank wants to close this output gap. 7. If the Central Bank wants to close this gap by changing the Money Supply in circulation, how much does the MS need to change to close this gap? What is the new interest rate? Show your work. 8. Suppose instead that the Central Bank wants to reduce the money supply by raising reserve requirements instead. How much does it need to raise the reserve requirements to close this gap? Show your work. For the purposes of the next questions, the First MD Curve is as before: MD = 20,000 – 1,000i And the Second MD curve a new MD curve: MD = 20,000 – 400i
Transcribed Image Text:Now suppose that the Central Bank has set the current Money Supply to be equal to $8,000. This Money Supply is currently made up of $2,000 of printed currency, and $6,000 of Bank Deposits. The current mandated reserve ratio is 10%. The Demand for Money (MD) as a function of the interest rate ("i") is given by: 1 MD = 20,000 – 1,000i 5. Draw the MS and MD curves in a single figure. Label all x-intercepts and y-intercepts. Where is the equilibrium in the money market? Given this, what is the current prevailing market interest rate (i*)? Now suppose that there is an increase in autonomous consumption of 180. 6. What will be the new short-run equilibrium Real GDP in this case? Are we in an inflationary gap or output gap now? How large is it? Show your work. Finally, suppose that for every 1% decrease in the interest rate, Desired Consumption will increase by $25 and Desired Investment will increase by $25. The Central Bank wants to close this output gap. 7. If the Central Bank wants to close this gap by changing the Money Supply in circulation, how much does the MS need to change to close this gap? What is the new interest rate? Show your work. 8. Suppose instead that the Central Bank wants to reduce the money supply by raising reserve requirements instead. How much does it need to raise the reserve requirements to close this gap? Show your work. For the purposes of the next questions, the First MD Curve is as before: MD = 20,000 – 1,000i And the Second MD curve a new MD curve: MD = 20,000 – 400i
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