I need help soon as possible # Impact of Inflation on Money Markets## 2. Graphically show the impact of inflation on the money markets under the following cases:### (a) The central bank targets interest ratesIn this scenario, the central bank aims to influence the short-term interest rates through open market operations. The objective is to manage inflation by adjusting the interest rates. #### Detailed Graph Description:- **X-Axis**: Represents the quantity of money.- **Y-Axis**: Represents the interest rate.- **Original Demand Curve (Dm)**: This curve slopes downward, indicating the inverse relationship between the quantity of money demanded and the interest rate.- **Shift in Demand Curve Due to Inflation (D′m)**: This curve shifts to the right, indicating an increase in the demand for money due to higher price levels. - **Original Supply Curve (Sm)**: This curve is vertical if the central bank targets interest rates, indicating that the money supply is fixed.- **Equilibrium Point (E0 to E1)**: Originally at point E0, the equilibrium moves to point E1, reflecting a higher interest rate due to the increased demand.### (b) The central bank targets money supplyIn this case, the central bank controls the money supply directly, irrespective of the interest rate, to manage inflation.#### Detailed Graph Description:- **X-Axis**: Represents the quantity of money.- **Y-Axis**: Represents the interest rate.- **Original Demand Curve (Dm)**: Similar to the previous scenario, this curve slopes downward.- **Shift in Demand Curve Due to Inflation (D′m)**: This curve shifts to the right, reflecting the increase in demand for money. - **Original Supply Curve (Sm)**: When targeting money supply, the supply curve is vertical, fixed at the targeted money supply level.- **Equilibrium Point (E0 to E1)**: Originally at E0, the new equilibrium moves to a higher interest rate at point E1 due to the shift in the demand curve.In both cases, inflation leads to a higher demand for money, which in turn affects the interest rates depending on the central bank's policy focus. The visual representation of these shifts would typically include curves and equilibrium points as described, depicting how inflation impacts the money market dynamics under different central bank targets.

An increase in the inflation rate increases the prices of goods and services in the economy. This…

Answered: 2. Graphically show the impact of…

2. Graphically show the impact of inflation on the money markets under following cases. (a) The central bank target interest rates (b) The central bank targets money supply.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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