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With the help of theory of liquidity preference describe, ‘why an increase in the money supply lowers the interest rate’?
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- A purchase of U.S. government securities by the Fed causes A. a multiple contraction of the money supply because deposits fall by more than the amount of the securities purchased. B. a contraction of the money supply equal to the amount of the securities because all other transactions occur within the banking system. C. an expansion of the money supply equal to the amount of the securities because all other transactions occur within the banking system. D. a multiple expansion of the money supply because the required reserve ratio is less than oneWhen the money market is depicted in a diagram with the value of money on the vertical axis, what would shift money demand to the left? a. an increase in the price level b. a decrease in the price level c. a decrease in real GDP d. an increase in real GDP ہے. What is the opportunity cost of holding money? How is k related to the velocity of money? s. Use the Quantity Theory of Money to explain how long run inflation occurs. If the Federal Reserve Bank wishes to keep the inflation rate at zero percent, at what rate should the money supply grow? Why?
- 61. The total demand for money curve will increase (as a result of): A. if investors perceive less risk in the stock market and expect stock prices to increase causing investors to want to buy stocks. B. a decrease in nominal GDP. C. if investors perceive more risk in the stock market and expect stock prices to decline causing investors to want to sell their stocks. D. an increase in interest rates.The neutrality of money revisited a. Fill in the empty spaces after Year 1 in the chart below: b. What is the growth rate of the nominal money supply between years 1 and 2, 2 and 3, and 3 and 4? c. What is the rate of inflation between years 1 and 2, 2 and 3, and 3 and 4? d. What is the change in the real money supply between years 1 and 2, 2 and 3, and 3 and 4? e. What assumption has been made about real output growth if this data describe the medium run?Consider the model of supply and demand for central bank money. Assumethat there there are commercial banks. Suppose that people hold 20% of their moneyin currency and 80% of their money in deposits. The central bank sets the reserve-todeposit ratio at 10%. In the first period, the central bank increases the supply of moneyby $200, buying bonds through Open-Market Operations. Use this information to answerthe following questions:(a) For the second period (after the central bank has injected $200 in theeconomy), calculate: (i) the demand for currency, (ii) the amount of deposit held atthe commercial banks, (iii) the demand for reserves held at the central bank, and(iv) the demand for the high-powered money. How much is the additional moneysupply created at the end of the second period?2(b) How much is the additional money supply created at the end of the thirdperiod?(c) As time continues, additional money supply will be created. Calculatethe total increase in the money supply as a…
- Summarize the threemotives underlyingthe liquidity preference theory of moneydemandWhat quantity is measured along the horizontal axis? the price level O the quantity of money O the real interest rate On the graph, MS represents the money supply and MD represents money demand. The usual quantities are measured along the axes. O the value of money 1.125- 1 0.875 0.75 0.625 + 05 0375 + 025 0.125- MS 5,000 MD₂ MD₁How can interest rates remain stable, with a constant rate of inflation and an increasing money supply? a. The money transmission mechanism does not apply in a situation of sustained inflation. b. The declining interest rates cause the investment demand curve to shift to the left, which causes interest rates to rise. c. The declining interest rates cause the investment demand curve to shift to the right, which causes interest rates to rise. d. The rising price level is increasing the demand for money, offsetting the impact of the rising money supply. e. The rising price level is decreasing the demand for money which is pushing interest rates up.
- Using the theory of liquidity preference what effect does an increase in the money supply has on the real interest rate Select one O a. An increase in the money supply shits the supply of real money balances to the right leading to an decrease in the interest rate to regain equitum OD an increase in the money supply has no effect on the interest rate because prices are still fed @cAn increase in the money supply shifts the demand for real money balances to the right leading to an increase in the interest rate to regain equarium O d. An increase in the money supply shifts the supply of real money balances to the right leading to an increase in the interest rate to regain equilibriumQUESTION 19 According to liquidity-preference theory, in which circumstance would the money-supply curve shift left? a. if the interest rate increased b. only if the Bank of Canada chose to decrease the money supply c. if government spending decreased d. if the price level increasedIn the liquidity-preference theory of interest, the quantity of money demanded forspecultative purposes will ordinarily: A. increase with a rise in the interest rate B. increase with a fall in the interest rate C. Decrease with a fall in the interest rate D. Remain constant when the interest rate rises
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