rchase goods and services then cash. (a) Draw a correctly labeled graph of the money market and show the effect of the reduced holdings of money on the equilibrium nominal interest rate in the short-run. (b) Based on the change in the interest rate in part (a)
Assume that an economy is in long-run equilibrium. Assume consumers wish to hold less money because they use credit cards more frequently to purchase goods and services then cash.
(a) Draw a correctly labeled graph of the
(b) Based on the change in the interest rate in part (a), what will happen to each of the following in the short-run?
i. Prices of previously issued bonds
ii. The
(c) With a constant money supply, based on your answer in b(ii), will the velocity of money increase, decrease, or remain the same, or is the change indeterminate?
(d) If the Central Bank wishes to reverse the change in the interest rate identified in part (a), what open market operation would it use?
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