2. The theory of liquidity preference and the downward-sloping aggregate demand curve 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 increases from 120 to 140. Shift the appropriate curve on the graph to show the impact of an increase in the overall price level on the market for money. INTEREST RATE (Percent) 0 0 10 Money Supply 20 30 40 MONEY (Billions of dollars) MD1 MD2 50 60 Money Demand The following graph plots the aggregate demand curve for this economy. Money Supply (?) than the quantity of money Following the price level increase, the quantity of money demanded at the initial interest rate of 3% will be greater supplied by the Fed at this interest rate. As a result, individuals will attempt to increase their money holdings. In order to do so, they will sell bonds and other interest-bearing assets, and bond issuers will realize that they have to offer higher interest rates until equilibrium is restored in the money market at an interest rate of 4%.

2. The theory of liquidity preference and the downward-sloping aggregate demand curve 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 increases from 120 to 140. Shift the appropriate curve on the graph to show the impact of an increase in the overall price level on the market for money. INTEREST RATE (Percent) 0 0 10 Money Supply 20 30 40 MONEY (Billions of dollars) MD1 MD2 50 60 Money Demand The following graph plots the aggregate demand curve for this economy. Money Supply (?) than the quantity of money Following the price level increase, the quantity of money demanded at the initial interest rate of 3% will be greater supplied by the Fed at this interest rate. As a result, individuals will attempt to increase their money holdings. In order to do so, they will sell bonds and other interest-bearing assets, and bond issuers will realize that they have to offer higher interest rates until equilibrium is restored in the money market at an interest rate of 4%.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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