Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134078779
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Question
Chapter 25, Problem 4.1P
To determine
Impact of Fed's expansionary money supply in the liquidity trap.
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Please answer everything in the photos including both of the graphs.
The following graph shows an increase in the demand for money from 2013 (MD2013) to 2014 (MD2014) caused by an increase in aggregate output.
5.00%
5.25%
The initial equilibrium interest rate in 2013 was
Suppose the Federal Reserve (the Fed) chooses not to alter the money supply between 2013 and 2014.
On the following graph, use the grey point (star symbol) to indicate the equilibrium interest rate and quantity of money that would result from this
lack of intervention.
NOMINAL INTEREST RATE (Percent)
6.25
6.00
5.75
5.50
5.25
5.00
4.75
4.50
4.25
0.9
1.0
1.1
1.2
1.3
1.4
QUANTITY OF MONEY (Trillions of dollars)
Because
Money Supply
1.5
B
MD
MD
2013
Suppose the Fed wants to keep 2014 interest rates at their 2013 level.
2014
☆
No Intervention
New MS Curve
With Intervention
5.50%
5.75%
6.00%
?
A-rapidly increasing the money supply causes hyperinflati
investment responds to changes in the interest rate
markets prefer low inflation to stable interest rates
On the previous graph, place the green…
The following graph represents the money market for some hypothetical economy. This economy is similar to the United States in the sense that it has a central bank called the Fed, but a major difference is that this economy is closed (and therefore does not have any interaction with other world economies). 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 the graph by the grey star symbol.
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 the correct location. Place the black point (plus symbol) at the new equilibrium interest rate and quantity of money.
Suppose the following graph shows the aggregate demand curve for this economy. The Fed's policy of targeting a lower interest rate will (increase/reduce) the cost of borrowing, causing residential and business investment spending to (increase/decrease) and…
Chapter 25 Solutions
Principles of Economics (12th Edition)
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Similar questions
- The following graph represents the money market in a hypothetical economy. This economy has a central bank, but unlike in Canada, the economy is closed (that is, the economy does not interact with other economies in the world). The money market is currently in equilibrium at an interest rate of 2.5% and a quantity of money equal to $0.4 trillion, as indicated by the grey star. PRICE LEVEL INTEREST RATE (Percent) 4.5 4.0 3.5 1.5 1.0 0.5 0 Money Demand 0.1 Money Supply 0,2 0.3 0.4 0.5 MONEY (Trillions of dollars) 0.0 0.7 0.8 A New MS Curve OUTPUT + New Equilibrium Suppose the central bank announces that it is lowering its target interest rate by 75 basis points, or 0.75 percentage point. To do this, the central bank will use open-market operations to ▼ the money by Y the 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 the correct location. Place the black point (plus symbol) at the…arrow_forwardThe following graph represents the money market for some hypothetical economy. This economy is similar to the United States in the sense that it has a central bank called the Fed, but a major difference is that this economy is closed (and therefore does not have any interaction with other world economies). The money market is currently in equilibrium at an interest rate of 3% and a quantity of money equal to $0.4 trillion, designated on the graph by the grey star symbol. Suppose the Fed announces that it is raising its target interest rate by 75 basis points, or 0.75 percentage points. To do this, the Fed will use open-market operations to (increase/decrease) the (demand for/supply for) money by (buying bonds from/selling bonds to) the 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 the correct location. Place the black point (plus symbol) at the new equilibrium interest rate…arrow_forwardThe following graph represents the money market in a hypothetical economy. As in the United States, this economy has a central bank called the Fed, but unlike in the United States, the economy is closed (that is, the economy does not interact with other economies in the world). The money market is currently in equilibrium at an interest rate of 3.5% and a quantity of money equal to $0.4 trillion, as indicated by the grey star.arrow_forward
- The following graph shows the money market in a hypothetical economy. The central bank in this economy is called the Fed. Assume that the Fed fixes the quantity of money supplied. Suppose the price level increases from 150 to 175. Shift the appropriate curve on the graph to show the impact of an increase in the overall price level on the market for money. INTEREST RATE (Percent) 18 15 12 60 3 0 0 15 Money Supply Money Demand 30 45 60 MONEY (Billions of dollars) 75 90 Money Demand Money Supply (?) After the increase in the price level, the quantity of money demanded at the initial interest rate of 9% will be supplied by the Fed at this interest rate. People will try to other interest-bearing assets, and bond issuers will find that they equilibrium at an interest rate of % than the quantity of money bonds and interest rates until the money market reaches its new their money holdings. In order to do so, people willarrow_forwardwould appreciate help with the following questions thank youarrow_forwardHomework (Ch 34) a central bank called the Fed, but a major difference is that this economy is closed (and therefore does not have any interaction with other world economies). 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 the graph by the grey star symbol. INTEREST RATE (Percent) 4.5 4.0 3.5 3.0 2.5 2.0 - 1.5 + 1.0 + 0.5 0 Money Demand 0.1 0.2 0.3 0.4 Money Supply 0.5 0.6 0.7 0.8 14 New MS Curve + New Equilibrium ? Q Search this coursearrow_forward
- 6. Changes in the money supply The following graph represents the money market for some hypothetical economy. This economy is similar to the United States in the sense that it has a central bank called the Fed, but a major difference is that this economy is closed (and therefore does not have any interaction with other world economies). The money market is currently in equilibrium at an interest rate of 3.5% and a quantity of money equal to $0.4 trillion, designated on the graph by the grey star symbol. INTEREST RATE (Percent) 5.5 5.0 New MS Curve Money Demand 4.5 4.0 3.5 3.0 2.5 2.0 1.5 0 0.1 0.2 Money Supply 0.3 0.4 0.5 0.6 0.7 0.8 MONEY (Trillions of dollars) New Equilibrium (?) Suppose the Fed announces that it is raising its target interest rate by 50 basis points, or 0.5 percentage points. To do this, the Fed will use open- market operations to the money by the public. Use the green line (triangle symbol) on the previous graph to illustrate the effects of this policy by placing…arrow_forwardOn the following graph, use the grey point (star symbol) to indicate the equilibrium interest rate and quantity of money that would result from this lack of intervention. Suppose the Fed wants to keep 2014 interest rates at their 2013 level. On the previous graph, place the green line (triangle symbols) to indicate the new money supply curve if the Fed follows this policy. Then use the black point (plus symbol) to indicate the equilibrium interest rate and quantity of money in this case. Because , most central banks set monetary policy aimed at targeting a specific .arrow_forwardthe table below has the demand for money schedule. if the central bank supplies $ 1.1 trillion dollars, what is the equilibrium interest rate? if the interest rate is 6 percent and central bank supplies $1.0 trillion dollars, what will happen to the price of bonds and interest rates? what is the equilibrium condition for the money market? what is the interest rate in the demand for money? interest rate (percent per year) Quantity of money demanded(trillions of 2005 dollars) 8 0.7 6 0.9 4 1.1 2 1.3 Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism.Answer completely.You will get up vote for sure.arrow_forward
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