Currently, the money market is at the equilibrium with the interest rate at the Fed’s target level. Suppose $Y1 decreased to $Y2. Explain how it affects the equilibrium interest rate and the equilibrium money using the graph of the money market equilibrium.
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- 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 AD₂Suppose 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 (AD₂). 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 RATE 112 110 108 106 104 102 100 12 100 10 AD, 09 102 104 106 108 110 112 OUTPUT (Billions of dollars) The following graph plots equilibrium in the money market at an interest rate of 6% and a quantity of money equal to $60 billion. 114 116 Show the impact of the increase in government purchases on the interest rate by shifting one or both of the curves on the following graph. ? þ 4 Money…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 (AD₂). 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 CATE 112 110 108 106 104 102 100 100 12 A AD₁ 9 10 102 104 106 108 110 OUTPUT (Billions of dollars) 112 Money Supply N 114 116 The following graph plots equilibrium in the money market at an interest rate of 6% and a quantity of money equal to $60 billion. þ † Show the impact of the increase in government purchases on the interest rate by shifting one or both of the curves on the following…
- 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. Quantity of Money Demanded Price Level (P) Value of Money (1/P) 1.00 1.00 (Billions of dollars) 2.0 1.33 0.75 2.00 0.50 4.00 0.25 2.5 4.0 8.0 ما Now consider the relationship between the quantity of money that people demand and the price level. The lower the price level, the less required to complete transactions, and the more money people will want to hold in the form of currency or demand deposits. moneyHomework (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 3Using the table below, answer the questions below about the market for money: Nominal Interest Rate Money Demanded (Trillion $) 10% $0.00 9% $1.00 8% $2.00 7% $3.00 6% $4.00 5% $5.00 4% $6.00 3% $7.00 2% $8.00 a. Construct a graph of the market for money using the table above, where the money supply is $5 trillion. What is the equilibrium nominal interest rate? b. If the federal reserve wants to target a nominal interest rate of 6% will they have to increase or decrease the money supply? What will the new money supply be?
- 2. Money supply, money demand, and adjustment to monetary equilibrium 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. Quantity of Money Demanded Price Level (P) Value of Money (1/P) (Billions of dollars) 1.00 1.00 1.33 0.75 2.00 0.50 4.00 0.25 1.5 2.0 3.5 7.0 Now consider the relationship between the quantity of money that people demand and the price level. The lower the price level, the less required to complete transactions, and the less 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. 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. moneyWhat shifts on the graph provided?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
- 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…The following diagram represents the equilibrium in the money market. Explain the following question with the help of the graph ( in the picture ): a) What is the equilibrium level of interest rate and quantity of money demanded and supplied? b) What would happen in the money market if the market prevailing interest rate is 8? Describe the adjustment mechanism? c) How price level affects the money demand curve? How could you reflect this change diagrammatically? d) Why the Money supply curve is vertical and independent of the interest rate? Explain? e) Suppose central bank of Bangladesh decided to use open market sale of securities. How does it affect the money supply of the economy? Explain with graph?The following graph shows an increase in the demand for money from 2013 (MD2013) to 2014 (MD2014) caused by an increase in aggregate output. 5.00% 5.25% The initial equilibrium interest rate in 2013 was Suppose the Federal Reserve (the Fed) chooses not to alter the money supply between 2013 and 2014. On the following graph, use the grey point (star symbol) to indicate the equilibrium interest rate and quantity of money that would result from this lack of intervention. NOMINAL INTEREST RATE (Percent) 6.25 6.00 5.75 5.50 5.25 5.00 4.75 4.50 4.25 0.9 1.0 1.1 1.2 1.3 1.4 QUANTITY OF MONEY (Trillions of dollars) Because Money Supply 1.5 B MD MD 2013 Suppose the Fed wants to keep 2014 interest rates at their 2013 level. 2014 ☆ No Intervention New MS Curve With Intervention 5.50% 5.75% 6.00% ? A-rapidly increasing the money supply causes hyperinflati investment responds to changes in the interest rate markets prefer low inflation to stable interest rates On the previous graph, place the green…