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 decreases from 150 to 125. Shift the appropriate curve on the graph to show the impact of a decrease in the overall price level on the market for money. INTEREST RATE (Percent) 18 15 N 3 O 0 5 Money Supply Money Demand 10 15 20 MONEY (Billions of dollars) 25 30 Money Demand . Money Supply Following the price level decrease, the quantity of money demanded at the initial interest rate of 9% will be supplied by the Fed at this interest rate. As a result, individuals will attempt to bonds and other interest-bearing assets, and bond issuers will realize that they restored in the money market at an interest rate of % than the quantity of money their money holdings. In order to do so, they will interest rates until equilibrium is
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 decreases from 150 to 125. Shift the appropriate curve on the graph to show the impact of a decrease in the overall price level on the market for money. INTEREST RATE (Percent) 18 15 N 3 O 0 5 Money Supply Money Demand 10 15 20 MONEY (Billions of dollars) 25 30 Money Demand . Money Supply Following the price level decrease, the quantity of money demanded at the initial interest rate of 9% will be supplied by the Fed at this interest rate. As a result, individuals will attempt to bonds and other interest-bearing assets, and bond issuers will realize that they restored in the money market at an interest rate of % than the quantity of money their money holdings. In order to do so, they will interest rates until equilibrium is
Chapter16: Monetary Policy
Section: Chapter Questions
Problem 8SQ
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Transcribed Image Text: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 decreases from 150 to 125.
Shift the appropriate curve on the graph to show the impact of a decrease in the overall price level on the market for money.
Money Supply
15
12
4
Money Demand
3
5
10
15
20
MONEY (Billions of dollars)
INTEREST RATE (Percent)
18
0
0
25
30
Money Demand
Money Supply
(?)
Following the price level decrease, the quantity of money demanded at the initial interest rate of 9% will be
supplied by the Fed at this interest rate. As a result, individuals will attempt to
bonds and other interest-bearing assets, and bond issuers will realize that they
restored in the money market at an interest rate of
than the quantity of money
their money holdings. In order to do so, they will
interest rates until equilibrium is
Transcribed Image Text:The following graph plots the aggregate demand curve for this economy.
Show the impact of the decrease in the price level by moving the point along the curve or shifting the curve.
?
PRICE LEVEL
300
250
200
150
100
50
0
0
I
10
Aggregate Demand
20
30
OUTPUT (Billions of dollars)
40
50
80
The change in the interest rate found in the previous task will lead to a
in the quantity of output demanded in the economy.
Aggregate Demand
in residential and business spending, which will cause
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