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) 60 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 1.2 0.8 QUANTITY OF MONEY (Trillions of dollars) 1.3 A 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 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 rate. Individuals and the interest rate This process and businesses adjust their asset portfolios by bonds. As a result, the price of bonds continues until the new equilibrium interest rate is achieved.

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) 60 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 1.2 0.8 QUANTITY OF MONEY (Trillions of dollars) 1.3 A 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 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 rate. Individuals and the interest rate This process and businesses adjust their asset portfolios by bonds. As a result, the price of bonds continues until the new equilibrium interest rate is achieved.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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13. (Question 6 on p.347) Explain the links between changes in the nation's money supply, the interest rate, investment spending, aggregate demand, and real GDP (and the price level). A change in the nation's money supply (achieved by changing reserves in the banking system) will cause an opposite change in the interest rate. A reduction in the money supply will make funds increasingly ( scarce, abundant ) and drive (up, down) their price (interest rate). The interest rate and investment spending are also ( directly, inversely) related. A rising interest rate will make some investments (capital spending projects) unprofitable, so spending on those will (increase, decline ). Investment spending is part of aggregate demand, so they will move together, as will real GDP. A decline in spending (AD) will (increase, reduce ) inflationary pressure (and will ( increase, reduce ) prices if they are downwardly flexible).
Fill in the table, and use it to answer the following questions. 2015 2016 Quantity of Money €300 €336 Velocity of Money 20 Price Level €7.50 € Quantity of Output 800 800 In 2015, nominal GDP was € whereas in 2016, nominal GDP was € The money supply grew at a rate of % from 2015 to 2016. Since the velocity of money the change in the money supply caused nominal GDP to grow by %. Moreover, since apple output did not change from 2015 to 2016, the change in money supply was reflected in changes in the price level. The inflation rate from 2015 to 2016 was %. Which of the following caused the inflation between 2015 and 2016? An increase in the money supply An increase in real GDP A decrease in the velocity of money Assume the money demand function for this economy is a function of income (Y) and a constant (k) in the following way: Demand for Money kY In 2015, real money balances were . This implies that people want to hold of every euro of income in the form of money.
5. Fiscal policy, the money market, and aggregate demand Suppose there is some hypothetical economy in which households spend $0.50 of each additional dollar they earn and save the $0.50 they have left over. The following graph plots the economy's initial aggregate demand curve (AD₁). Suppose now that the government increases its purchases by $3.5 billion. Use the green line (triangle symbol) on the following graph to show the aggregate demand curve (AD₂) after the multiplier effect takes place. Hint: Be sure the new aggregate demand curve (AD₂) is parallel to AD₁. You can see the slope of AD₁ by selecting it on the following graph. PRICE LEVEL 116 114 112 110 108 106 104 102 100 AD₁ 100 102 104 106 108 110 OUTPUT (Billions of dollars) 112 114 116 AD₂ $3 AD₂
I only need Help with part (B)
19. If the Fed reduces the money supply to reduce inflation: a) the interest rate will increase, and the price of US exports will fall and the price of US imports will rise. b) the interest rate will increase, and the price of US exports will rise and the price of US imports will fall. c) the interest rate will increase, and the price of both US exports and US imports will rise. d) the interest rate will increase, and the price of both US exports and US imports will fall.
2. Critical analysis Q8 Indicate how each action in the following table would affect the money supply. Action Increase Money Supply Decrease Money Supply A purchase by the Fed of $100 million in U.S. securities from a commercial bank A sale by the Fed of $200 million in U.S. securities to a private investor
#27 You saved $900 in currency in your piggy bank to purchase a new iPhone. The $900 you kept in your piggy bank illustrates money’s function as a _______. The iPhone’s price is posted as $900. The $900 price illustrates money’s function as a _____. You use the $900 to purchase the iPhone. This transaction illustrates money’s function as a ______. a medium of exchange, unit of account, store of value b medium of exchange, store of value, unit of account c store of value, medium of exchange, unit of account d store of value, unit of account, medium of exchange
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(Figure: A Money Market) The accompanying figure Equilibrium in the Money Market shows the money market in equilibrium at an interest rate of r2. Holding the money supply constant, which of the following might cause the interest rate in the market to decrease to r1? A) The inflation rate falls to historically low levels. B) Higher payroll taxes cause employers to pay workers cash under the table. C) There is a significant increase in the stock market. D) A recession decreases real GDP.
2. Equilibrium and disequilibrium in the money market The following diagram represents the money market in the United States, which is currently in equilibrium. INTEREST RATE (Percent) 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 0.6 0.7 Money supply 0.9 1.0 1.1 1.2 1.3 0.8 QUANTITY OF MONEY (Trillions of dollars) Money demand the Money demand Money supply ? Suppose the Federal Reserve announces that it is lowering its target interest rate by 75 basis points, or 0.75%. It would achieve this by Shift either the money supply curve or the money demand curve, or both, to illustrate on the graph the effects of this policy. 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, the quantity of interest-bearing financial assets such as bonds demanded , which means that bond issuers until the new equilibrium interest rate is achieved. sell the bonds. This process…
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