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. Following the price level decrease, the quantity of money demanded at the initial interest rate of 6% will be (greater/less) than the quantity of money supplied by the Fed at this interest rate. As a result, individuals will attempt to (increase/decrease) their money holdings. In order to do so, they will (buy/sell) bonds and other interest-bearing assets, and bond issuers will realize that they (have to offer higher/can offer lower) interest rates until equilibrium is restored in the money market at an interest rate of________% The following graph plots the aggregate demand curve for this economy. Show the impact of the decrease in the price level by moving the point along the curve or shifting the curve. The change in the interest rate found in the previous task will lead to a (fall/rise) in residential and business spending, which will cause (a decrease/an increase)i n the quantity of output demanded in 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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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.

Following the price level decrease, the quantity of money demanded at the initial interest rate of 6% will be (greater/less) than the quantity of money supplied by the Fed at this interest rate. As a result, individuals will attempt to (increase/decrease) their money holdings. In order to do so, they will (buy/sell) bonds and other interest-bearing assets, and bond issuers will realize that they (have to offer higher/can offer lower) interest rates until equilibrium is restored in the money market at an interest rate of________%

The following graph plots the aggregate demand curve for this economy.

Show the impact of the decrease in the price level by moving the point along the curve or shifting the curve.

The change in the interest rate found in the previous task will lead to a (fall/rise) in residential and business spending, which will cause (a decrease/an increase)i n the quantity of output demanded in the economy.

Shift the appropriate curve on the graph to show the impact of a decrease in the overall price level on the market for money.
INTEREST RATE (Percent)
12
10
0
2
0
0
10
Money Supply
Money Demand
20
30
40
MONEY (Billions of dollars)
50
60
Money Demand
Money Supply
(?)

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