Q5 Monetary policy is the actions of the central bank to manage the money supply and interest rates to achieve its macroeconomic policy goals. (a) Figure Q5(a) shows the graph of the money market where MS represents the supply of money curve and MD represents the demand for money curve. M82 MSI MD2 MD1 Interest Rate (i) Quantity of Money (M) Figure Q5(a): Money market equilibrium (i) Describe the situation where the Central Bank reduces money supply and shifts money supply curve from MSI to MS2. Explain the effect to interest rate when the demand for money increase in the market and money demand curve shifts from MDI to MD2. Assume the money supply curve remains at MS 1. (b) Explain TWO (2) effects of contractionary fiscal policy on the demand-side of the economy.

Q5 Monetary policy is the actions of the central bank to manage the money supply and interest rates to achieve its macroeconomic policy goals. (a) Figure Q5(a) shows the graph of the money market where MS represents the supply of money curve and MD represents the demand for money curve. M82 MSI MD2 MD1 Interest Rate (i) Quantity of Money (M) Figure Q5(a): Money market equilibrium (i) Describe the situation where the Central Bank reduces money supply and shifts money supply curve from MSI to MS2. Explain the effect to interest rate when the demand for money increase in the market and money demand curve shifts from MDI to MD2. Assume the money supply curve remains at MS 1. (b) Explain TWO (2) effects of contractionary fiscal policy on the demand-side of the economy.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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(b) List one assumption of the quantity theory of money. Based on the simple quantity theory of money, what would be the impact on the economy of increasing the money supply by 5%?
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