1. Suppose that the Federal Reserve increases the money supply by 5 percent.a) Use the theory of liquidity preference to illustrate the impact of this policy on the short-runmarket for money. Do not forget to label the axes.-How did the money supply curve change?-How did the equilibrium interest rate change?b) Use the model of aggregate demand and aggregate supply (AD-AS) to illustrate the impact ofthe above interest rate change on the equilibrium quantity of output and price level in theshort run. Do not forget to label the axes.-How did the price level change?-How did the quantity of output change?

Money is a medium of exchange that is broadly acknowledged in transactions including goods,…

1. Suppose that the Federal Reserve increases the money supply by 5 percent. a) Use the theory of liquidity preference to illustrate the impact of this policy on the short-run market for money. Do not forget to label the axes. -How did the money supply curve change? -How did the equilibrium interest rate change?

1. Suppose that the Federal Reserve increases the money supply by 5 percent. a) Use the theory of liquidity preference to illustrate the impact of this policy on the short-run market for money. Do not forget to label the axes. -How did the money supply curve change? -How did the equilibrium interest rate change?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Concept explainers

Required Reserve and Excess Reserve Analysis

A required reserve is an amount of cash that banks must keep with themselves, which is certain percentage of the deposits made by their customers. Required reserve is a percentage of the bank's deposits that the respective bank must have on each overnight. The percentage rate is set and determined by the nation’s central bank. It is important to have such funds accumulated to meet its uncertain obligations, sudden liabilities and withdrawals. Required reserve is also known as reserve ratio. Reserve ratio is an important tool to control the money supply.

Question

1. Suppose that the Federal Reserve increases the money supply by 5 percent.
a) Use the theory of liquidity preference to illustrate the impact of this policy on the short-run
market for money. Do not forget to label the axes.
-How did the money supply curve change?
-How did the equilibrium interest rate change?
b) Use the model of aggregate demand and aggregate supply (AD-AS) to illustrate the impact of
the above interest rate change on the equilibrium quantity of output and price level in the
short run. Do not forget to label the axes.
-How did the price level change?
-How did the quantity of output change?

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2. Create the T-entry for the Fed that goes together with the choice in the question above
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