4. Changes in the money supply Suppose the following graph shows the aggregate demand curve for this economy. The Fed's policy of targeting a lower interest rate willthe cost of borrowing, causing residential and business investment spending toand the quantity of output demanded toat each price level.Shift the curve on the graph to show the general impact of the Fed's new interest rate target on aggregate demand.PRICE LEVELOUTPUTAggregate DemandOAggregate Demand 4. Changes in the money supplyThe following graph represents the money market for some hypothetical economy. This economy is similar to the United States in the sense that it hasa central bank called the Fed, but a major difference is that this economy is closed (and therefore does not have any interaction with other worldeconomies). The money market is currently in equilibrium at an interest rate of 2.5% and a quantity of money equal to $0.4 trillion, designated on thegraph by the grey star symbol.INTEREST RATE (Percent)4.54.03.53.02.5201.51.00.5Money Demand00.10.2Money Supply0.40.50.3MONEY (Trillions of dollars)0.60.70.8=New MS CurveNew EquilibriumSuppose the Fed announces that it is lowering its target interest rate by 75 basis points, or 0.75 percentage points. To do this, the Fed will use open-market operations tothemoney bythe public.Use the green line (triangle symbol) on the previous graph to illustrate the effects of this policy by placing the new money supply curve (MS) in thecorrect location. Place the black point (plus symbol) at the new equilibrium interest rate and quantity of money.

Central bank of a nation controls the money supply in the economy. A change in money supply changes…

Suppose the following graph shows the aggregate demand curve for this economy. The Fed's policy of targeting a lower interest rate will and the quantity of output demanded to the cost of borrowing, causing residential and business investment spending to at each price level. Shift the curve on the graph to show the general impact of the Fed's new interest rate target on aggregate demand.

Suppose the following graph shows the aggregate demand curve for this economy. The Fed's policy of targeting a lower interest rate will and the quantity of output demanded to the cost of borrowing, causing residential and business investment spending to at each price level. Shift the curve on the graph to show the general impact of the Fed's new interest rate target on aggregate demand.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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What happens to the quantity of money when you take cash from an ATM? The quantity of money ______. A. doesn't change because the quantity of currency doesn't change B. decreases because both vault cash and your bank deposit decrease C. increases because currency increases D. doesn't change because your bank deposit decreases and currency increases by the same amount
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8. The reserve requirement, open market operations, and the moneysupply Assume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is demand deposits. To simplify the analysis, suppose the banking system has total reserves of $300. Determine the money multiplier and the money supply for each reserve requirement listed in the following table. Reserve Requirement Simple Money Multiplier Money Supply (Percent) (Dollars) 5 10 A higher reserve requirement is associated with a money supply. Suppose the Federal Reserve wants to increase the money supply by $200. Again, you can assume that banks do not hold excess reserves and that households do not hold currency. If the reserve requirement is 10%, the Fed will use open-market operations to worth of U.S. government bonds. Now, suppose that, rather than immediately lending out all excess reserves, banks begin…
5. Assume that the required reserve ratio is 20%. If the Fed sells $10 million worth of government bonds from the public, the maximum change in the money supply is: a) -$50 million. (b) -$20 million. (c) $20 million. (d) $50 million.
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23. Identify the four major methods the Fed uses to control the money supply. Give two examples of situations in which the Fed might use one of these methods and explain why that method is best for the given situation.
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4) Listen If the money multiplier decreased from 20 to 4, then the Fed increased the reserve ratio from 5 percent to 8 percent. the Fed increased the fed funds rate from 5 percent to 8 percent. the Fed increased the reserve ratio from 5 percent to 25 percent. the Fed decreased the fed funds rate from 8 percent to 5 percent. Question 30 (1 point) )Listen The FOMC is able to increase the money supply when it buys US government securities. The increase will be larger, the larger is the reserve ratio. buys US government securities. The increase will be larger, the smaller is the reserve ratio. sells US government securities. The increase will be larger, the smaller is the reserve ratio. sells US government securities. The increase will be larger, the larger is the reserve ratio.
1. Explain the differences between commodity money and fiat money. What are the major disadvantages of commodity money?
9. How can banks create money? A) By lending required reserves B) By borrowing excess reserves C) By telling the Fed they need more money; and the Fed creates it D) By lending excess reserves 10. What is the formula for figuring the total possible change in the money supply from excess reserves? A) (1/Excess reserves) × / Total Reserves B) (R/1) × A Reserves C) / Excess Reserves / Total Reserves D) (1/R)x A Reserves