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. 22 12 10 10 INTEREST RATE (Percent) 8 2 Money Supply Money Demand 0 0 15 30 45 60 75 90 MONEY (Billions of dollars) Money Demand Money Supply ? than the quantity of money their money holdings. In order to do so, they will Following the price level decrease, the quantity of money demanded at the initial interest rate of 6% 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 interest rates until equilibrium is restored in the money market at an interest rate of %
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. 22 12 10 10 INTEREST RATE (Percent) 8 2 Money Supply Money Demand 0 0 15 30 45 60 75 90 MONEY (Billions of dollars) Money Demand Money Supply ? than the quantity of money their money holdings. In order to do so, they will Following the price level decrease, the quantity of money demanded at the initial interest rate of 6% 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 interest rates until equilibrium is restored in the money market at an interest rate of %
Chapter26: Monetary Policy
Section: Chapter Questions
Problem 4SQP
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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.
22
12
10
10
INTEREST RATE (Percent)
8
2
Money Supply
Money Demand
0
0
15
30
45
60
75
90
MONEY (Billions of dollars)
Money Demand
Money Supply
?
than the quantity of money
their money holdings. In order to do so, they will
Following the price level decrease, the quantity of money demanded at the initial interest rate of 6% 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
interest rates until equilibrium is
restored in the money market at an interest rate of
%
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