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factor(s) will cause shifts in the money demand curve.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fa6e4e5fd-c65f-4f87-baf5-107beea50a33%2F0b13fb0d-86dd-48b1-be48-53cc3ccd55c6%2F676wz0l_processed.jpeg&w=3840&q=75)
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- 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 90 to 105. Shift the appropriate curve on the graph to show the impact of an increase in the overall price level on the market for money. Following the price level increase, the quantity of money demanded at the initial interest rate of 6% will be (greater/less)than the quantity of money supplied by the Fed at this interest rate. As a result, individuals will attempt to (increase/decrease) their money holdings. In order to do so, they will (buy/sell) bonds and other interest-bearing assets, and bond issuers will realize that they (have to offer higher/can offer lower) interest rates until equilibrium is restored in the money market at an interest rate of ______%. The following graph plots the…3. The effect of changes in the money supply The following diagram represents the money market in the United States, which is currently in equilibrium, as indicated by the grey star. INTEREST RATE (Percent) 6.0 5.5 Money Demand 5.0 4.5 4.0 3.5 3.0 2.5 20+ 0.6 07 Money Supply 0.9 1.0 1.1 0.8 1.2 QUANTITY OF MONEY (Trillions of dollars) 1.3 New Curve New Equilibrium (?) Suppose the Federal Reserve (the Fed) announces that it is raising its target interest rate by 50 basis points, or 0.50%. It would achieve this by Use the green line (triangle symbols) on the preceding graph to illustrate the effects of this policy. Place the a the black point (plus symbol) on the graph to indicate the new equilibrium interest rate and quantity of money. The sequence of events that results in a new equilibrium interest rate, after the Fed makes the change you selected, may be described as follows: Because there is money in the financial system, there is an excess money at the initial equilibrium interest…The following table gives the quantity of money demanded at various price levels (P), the money demand schedule. In the following table, fill in the column labeled Value of Money. Price Level (P) Value of Money (1/P) 1.00 1.33 2.00 4.00 Quantity of Money Demanded (Billions of dollars) 2.0 2.5 4.0 8.0 Now consider the relationship between the quantity of money that people demand and the price level. The lower the price level, the required to complete transactions, and the money people will want to hold in the form of currency or demand deposits. 1.25 Assume that the Federal Reserve initially fixes the quantity of money supplied at $2.5 billion. Use the orange line (square symbol) to plot the initial money supply (MS₁) set by the Fed. Then, referring to the previous table, use the blue connected points (circle symbol) to graph the money demand curve. (?) money
- The following table gives the quantity of money demanded at various price levels (P), the money demand schedule. In the following table, fill in the column labeled Value of Money. Price Level (P) Value of Money (1/P) 0.80 1.00 1.33 2.00 Now consider the relationship between the quantity of money that people demand and the price level. The lower the price level, the required to complete transactions, and the money people will want to hold in the form of currency or demand deposits. Assume that the Federal Reserve initially fixes the quantity of money supplied at $3.5 billion. VALUE OF MONEY 8 Use the orange line (square symbol) to plot the initial money supply (MS) set by the Fed. Then, referring to the previous table, use the blue connected points (circle symbol) to graph the money demand curve. 2.00 1.75 1.50 1.25 1.00 0.75 Quantity of Money Demanded (Billions of dollars) 1.5 2.0 3.5 0.50 025 0 7.0 3 QUANTITY OF MONEY (Billions of dollars) 7 101 MS, Money Demand M money ?The graph shows the demand for money curve and the supply of money curve. The Fed decreases the quantity of real money supplied to $3.9 trillion. Draw a new MS curve that shows the effect of the Fed's action. Label it. Draw a point at the new equilibrium quantity of money and interest rate. Before the Fed decreases the quantity of money, the equilibrium interest rate is percent a year. After the Fed decreases the quantity of money, at an interest rate of 4 percent a year, people want to hold money than the quantity supplied, so they bonds. A. more; sell B. less; buy C. less; sell D. more; buy The price of a bond A. falls; falls O B. rises; falls and the interest rate 8- 7- 6- 5- 4- 3- 2- 1- Nominal interest rate (percent per year) 4 0+ 3.8 MS 4.0 MD 4.0 4.1 3.9 Quantity of money (trillions of 2009 dollars) >>> Draw only the objects specified in the questi 4.2The asset demand for money 'Da' is shown in the graph below. The transactions demand for money is $50 billion. The supply of money is $150 billion. a. Show graphically the total demand for money and the supply of money for this economy. Instructions: Use the tools provided 'Dm' and 'Sm' to draw the total-demand-for-money curve (Dm) and the money supply curve (Sm) for this economy. Plot only the endpoints of the line. 14 Tools 12 Dm Sm 10 8 6 D. 50 100 150 200 250 300 350 Amount of money demanded (billions of dollars) Instructions: Enter your answer as a whole number. b. What is the equilibrium interest rate? percent Rate of interest (percent)
- A decrease in the money supply causes the interest rate to rise so that investment falls. a. TRUE b. FALSEQuantity of Money Demanded Which line in the above graph would best reflect the slope of the transactions demand for money curve? Line 2 Line 4 Line 3 Line 1 Rate of Interest 2.The following graph shows the money market in a hypothetical economy. The central bank in this economy is called the Fed. Assume that the Fed fixes the quantity of money supplied. Suppose the price level increases from 150 to 175. 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) 18 15 12 60 3 0 0 15 Money Supply Money Demand 30 45 60 MONEY (Billions of dollars) 75 90 Money Demand Money Supply (?) After the increase in the price level, the quantity of money demanded at the initial interest rate of 9% will be supplied by the Fed at this interest rate. People will try to other interest-bearing assets, and bond issuers will find that they equilibrium at an interest rate of % than the quantity of money bonds and interest rates until the money market reaches its new their money holdings. In order to do so, people will
- The graph on the right depicts real money supply. 1.) Using the three-point curve drawing tool, draw the aggregate money demand curve in the diagram to the right. Label this line 'L(R,Y)¹¹. Now suppose that consumers' preferences change in such a way that they choose to carry more cash. 2.) On the same graph, using the three-point curve drawing tool, draw the new aggregate demand for money curve as a result of this change. Label this line 'L(R,Y)²¹. Carefully follow the instructions above and only draw the required objects. As a result of this change in preferences, equilibrium in the money market will be at a interest rate. Real money holdings will Select none remain unchanged rise fall T Interest rate, R Delete Clear MS Real money holdings ?3. Changes in the money supply The following graph represents the money market for some hypothetical economy. This economy is similar to the United States in the sense that it has a central bank called the Fed, but a major difference is that this economy is closed (and therefore does not have any interaction with other world economies). The money market is currently in equilibrium at an interest rate of 2.5% and a quantity of money equal to $0.4 trillion, designated on the graph by the grey star symbol. INTEREST RATE (Percent) 4.5 4.0 6 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 Money Demand + 0.1 Money Supply 0.3 0.5 0.6 MONEY (Trillions of dollars) 0.2 0.7 0.8 New MS Curve New Equilibrium ? Suppose the Fed announces that it is lowering its target interest rate by 75 basis points, or 0.75 percentage points. To do this, the Fed will use open- market operations to the money by the public. Use the green line (triangle symbol) on the previous graph to illustrate the effects of this policy by placing…Draw a graph with the quantity of money on the horizontal axis and the interest rate on the vertical axis. Initially, the money supply curve is vertical because its determined by the Fed. The demand for money curve slopes downward, indicating the negative relationship between the interest rate and the quantity of money demanded.
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