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 fixesthe 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.(?12Money Supply10Money DemandMoney SupplyMoney Demand1015202530MONEY (Billions of dollars)After the increase in the price level, the quantity of money demanded at the initial interest rate of 6% will bev than the quantity of moneysupplied by the Fed at this interest rate. People will try totheir money holdings. In order to do so, people willbonds and otherinterest-bearing assets, and bond issuers will find that theyequilibrium at an interest rate of- interest rates until the money market reaches its new%.The following graph shows the economy's aggregate demand curve.Show the impact of the increase in the price level by moving the point along the curve or shifting the curve.(?300Aggregate Demand250200150100Aggregate Demand50102030405060OUTPUT (Billions of dollars)The change in the interest rate that you found previously will cause residential and business investment spending to , leadingtoin the quantity of output demanded in the economy.PRICE LEVEL

Investors should expect a higher interest rate or premium on assets with long-term maturities that…

Money Demand 2 5 10 15 20 25 30 MONEY (Billions of dollars) After the increase in the price level, the quantity of money demanded at the initial interest rate of 6% will be v than the quantity of money supplied by the Fed at this interest rate. People will try to v their money holdings. In order to do so, people will v bonds and other interest-bearing assets, and bond issuers will find that they v interest rates until the money market reaches its new equilibrium at an interest rate of %. The following graph shows the economy's aggregate demand curve. Show the impact of the increase in the price level by moving the point along the curve or shifting the curve. 300 250 Aggregate Demand 200 150 100 Aggregate Demand 50 10 20 30 40 50 60 OUTPUT (Billions of dollars) The change in the interest rate that you found previously will cause residential and business investment spending to v , leading to in the quantity of output demanded in the economy. PRICE LEVEL.

Money Demand 2 5 10 15 20 25 30 MONEY (Billions of dollars) After the increase in the price level, the quantity of money demanded at the initial interest rate of 6% will be v than the quantity of money supplied by the Fed at this interest rate. People will try to v their money holdings. In order to do so, people will v bonds and other interest-bearing assets, and bond issuers will find that they v interest rates until the money market reaches its new equilibrium at an interest rate of %. The following graph shows the economy's aggregate demand curve. Show the impact of the increase in the price level by moving the point along the curve or shifting the curve. 300 250 Aggregate Demand 200 150 100 Aggregate Demand 50 10 20 30 40 50 60 OUTPUT (Billions of dollars) The change in the interest rate that you found previously will cause residential and business investment spending to v , leading to in the quantity of output demanded in the economy. PRICE LEVEL.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Similar questions

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. INTEREST RATE 12 10 8 2 0 0 20 Money Supply known as the Money Demand 40 60 80 MONEY (Billions of dollars) 100 120 = Money Demand Money Supply ? Suppose that for every increase in the interest rate of one percentage point, the level of investment spending declines by $0.5 billion. Based on the changes made to the money market in the previous scenario, the new interest rate causes the level of investment spending to by Taking the multiplier effect into account, the change in investment spending will cause the quantity of output demanded to by at every price level. The impact of an increase in government purchases on the interest rate and the level of investment spending is effect. Use the purple line (diamond symbol) on the graph at the beginning of this problem to show the aggregate demand curve (AD3) after accounting for the impact of the increase…
Q47 Which of the following is the definition for the real supply of money? Select one: a. the actual quantity of money, rather than the officially reported quantity. b. the stock of high powered money only. c. the ratio of the real GDP to the nominal money supply. d. the stock of money measured in terms of goods, not dollars.
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 Ⓡ
If the fed decides to buy T bills it increases the the demand for T bills. How will this affect the price of T bills in interest rates
Imagine that the federal funds rate was above the level the Federal Reserve had targeted. To move the rate back towards itť's target the Federal Reserve could O sell bonds. This selling would reduce the money supply. O buy bonds. This buying would increase the money supply. O sell bonds. This selling would increase the money supply O buy bonds. This buying would reduce the money supply.
8. Macroeconomic factors that influence interest rate levels Apart from risk components, several macroeconomic factors—such as Federal Reserve (the Fed) policy, federal budget deficit or surplus, international factors, and levels of business activity—influence interest rates. Based on your understanding of the impact of macroeconomic factors, identify which of the following statements are true or false: Statements True False When the Fed increases the money supply, short-term interest rates tend to decline. Actions that lower short-term interest rates will always lower long-term interest rates. Long-term interest rates are not as sensitive to booms and recessions as are short-term interest rates. The Federal Reserve’s ability to use monetary policy to control economic activity in the United States is limited because US interest rates are highly dependent on interest rates in other parts of the world.
Suppose the income elasticity of money demand is 0.75 and the interest elasticity of money demand is -0.2. By what percentage does real money demand change in each of the following circumstances? a. Income rises 2%. b. The interest rate rises from 4% to 5%. c. Income falls 4%. d. The interest rate falls from 6% to 4%.
8. Macroeconomic factors that influence interest rate levels Apart from risk components, several macroeconomic factors-such as Federal Reserve (the Fed) policy, federal budget deficit or surplus, international factors, and levels of business activity-influence interest rates. Based on your understanding of the impact of macroeconomic factors, identify which of the following statements are true or false: Statements When the Fed increases the money supply, short-term interest rates tend to decline. If the Fed injects a huge amount of money into the markets, inflation is expected to decline, and long-term interest rates are expected to rise. During recessions, short-term interest rates decline more sharply than long-term interest rates. When the economy is weakening, the Fed is likely to decrease short-term interest rates. True False O O O O O O
Assume that the following data characterize the hypothetical economy of Trance: money supply = $210 billion; quantity of money demanded for transactions = $160 billion; quantity of money demanded as an asset = $10 billion at 12 percent interest, increasing by $10 billion for each 2-percentage-point fall in the interest rate. Instructions: Enter your answers as a whole number. a. What is the equilibrium interest rate in Trance? percent b. At the equilibrium interest rate, what are the quantity of money supplied, the quantity of money demanded, the amount of money demanded for transactions, and the amount of money demanded as an asset in Trance? Quantity of money supplied = $ billion Quantity of money demanded = $ billion Amount of money demanded for transactions = $ billion Amount of money demanded as an asset = $ billion
The income elasticity of money demand is ny = 0.7 and the interest rate elasticity of money demand is nj = -0.02. Suppose that the central bank increases the money supply by 5%, real income increases by 2% and inflation is 3%. What is the percentage increase in the nominal interest rate? O -0.3 (or -30%) O 0.3 (or 30%) O-0.1 (or -10%) O 0.1 (or 10%)
2. Suppose that in the U.S., the income velocity of money (V) is constant. Suppose, too, that every year, real GDP grows by 2.5 percent (%ΔY/year = 0.025) and the supply of money grows by 10 percent (%ΔM/year = 0.10). a. According to the Quantity Theory of Money, what would be the growth rate of nominal GDP = P×Y? Hint: %Δ(X×Y)  %ΔX + %ΔY.
A central bank carries out a contractionary open market operation *Another way of achieving the same thing as in an open market operation is to changethe banks’ refinancing rate. Explain carefully in which direction this rate would have tochange in order to achieve the same effect as the aforementioned contractionary openmarket operation, and how the banks’ reaction to this change brings about this effect