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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Homework (Ch 21) Consider a hypothetical economy in which households spend $0.50 of each additional dollar they earn and save the remaining $0.50. The following graph shows the economy's initial aggregate demand curve (AD₁). Suppose the government increases its purchases by $3 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 116 114 112 110 108 106 104 102 100 100 AD1 102 112 104 106 108 110 OUTPUT (Billions of dollars) 114 116 AD₂ AD 3
Figure 1: MS Interest Rate (%) 5% MD 150 Money (S million) 21. Refer to Figure 1. At an interest rate of 4%, there is a: a) excess demand for money and the interest rate will decline. b) excess demand for money and the interest rate will rise. c) excess supply of money and the interest rate will decline. d) excess supply of money and the interest rate will rise.
Figure 1, Money Supply and Money Demand Money Supply. MS, Money Supply. MS Value of money, 1/P 1/P1 1/P2 MD Quantity of Money, M (billions of dollars) S900 S950 Ceteris paribus, if the Fed increases the money supply from MS1 to MS2, as indicated in the diagram above, it follows that, in the short run, there will be pressure on the price level, and pressure on nominal interest rates. Select one: O a. upward; upward O b. downward; upward O c. upward, downward O d. downward; downward
8 99 Interest rate (percent) 4 2 0 MS1 MS2 E₁ 200 400 600 800 Quantity of money (billions of dollars) MD Starting from an equilibrium at E, in Exhibit 16-2, a rightward shift of the money supply curve from MS, to MS₂ would cause excess: A demand for money, leading people to sell bonds. B supply of money, leading people to buy bonds. supply of money, leading people to sell bonds. demand for money, leading people to buy bonds.
INTEREST RATE (Percent) 3 6 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 decreases from 90 to 75. Shift the appropriate curve on the graph to show the impact of a decrease in the overall price level on the market for money. 18 Money Supply 15 12 0 0 10 20 30 Money Demand 40 50 60 MONEY (Billions of dollars) Money Demand Money Supply Ⓡ
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
3. Changes in the money supply The following graph represents the money market in a hypothetical economy. As in the United States, this economy has a central bank called the Fed, but unlike in the United States, the economy is closed (that is, the economy does not interact with other economies in the world). The money market is currently in equilibrium at an interest rate of 4% and a quantity of money equal to $0.4 trillion, as indicated by the grey star. (? 6.0 A New MS Curve Money Demand 5.0 4.5 New Equilibrium 4.0 3.6 3.0 2.5 Money Supply 2.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 MONEY (Trillions of dollars) Suppose the Fed announces that it is lowering its target interest rate by 75 basis points, or 0.75 percentage point. To do this, the Fed will use open- market operations to v the v money by v the public. Use the green line (triangle symbol) on the previous graph to illustrate the effects of this policy by placing the new money supply curve (MS) in the correct location. Place the black…
TOPIC: Equilibrium in the money market NOTE: Everything you need will be in the picture. Thank you
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 ?
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