Answered: Draw graphs and explain in no more than…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Draw graphs and explain in no more than five sentences the effects on the equilibrium real interest rate (r) and equilibrium quantity demanded of money (M/P) of the following monetary policy, or of the change in the market for real goods and services. Assume that cash and government bonds are the only financial assets in the money or financial market. Note that M is nominal money supply, P is aggregate price level of real goods and services, and Y is aggregate real income, real output, or real GDP. The central bank raises the borrowing rate through its discount facility to banks at time t = 2. All other variables are assumed to be constant (i.e. P = P1 = P2, Y=Y1=Y2). Assume that the initial equilibrium real interest rate is r1, and equilibrium quantity demanded of real money is M1/P1 at time t = 1.

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