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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Chapter 26, Problem 2.4P
Subpart (a):
To determine
The graphical illustration for the changes in equilibrium output and interest rate.
Subpart (b):
To determine
The graphical illustration for the changes in equilibrium output and interest rate.
Subpart (c):
To determine
The graphical illustration for the changes in equilibrium output and interest rate.
Subpart (d):
To determine
The graphical illustration for the changes in equilibrium output and interest rate.
Subpart (e):
To determine
The graphical illustration for the changes in equilibrium output and interest rate.
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The above figure has the demand for money curve. Suppose the Fed initially sets the quantity of money equal to $0.6 trillion. Draw the supply of money curve in the figure. What is the equilibrium interest rate? Now suppose the Fed increases the quantity of money to $0.9 trillion. Draw the new supply curve. What is the new equilibrium interest rate?
If the Fed sells $100 million of U.S. government securities, what happens to the quantity of money?
The graph shows the demand for money curve and the supply of money curve.
The Fed decreases the quantity of real money supplied to $3.9 trillion.
Draw a new MS curve that shows the effect of the Fed's action. Label it.
Draw a point at the new equilibrium quantity of money and interest rate.
Before the Fed decreases the quantity of money, the equilibrium interest rate is
percent a year.
After the Fed decreases the quantity of money, at an interest rate of 4 percent a year,
people want to hold
money than the quantity supplied, so they
bonds.
A. more; sell
B. less; buy
C. less; sell
D. more; buy
The price of a bond
A. falls; falls
O B. rises; falls
and the interest rate
8-
7-
6-
5-
4-
3-
2-
1-
Nominal interest rate (percent per year)
4
0+
3.8
MS
4.0
MD
4.0
4.1
3.9
Quantity of money (trillions of 2009 dollars)
>>> Draw only the objects specified in the questi
4.2
The money demand market is currently in equilibrium with MS = MD and the equilibrium interest rate. Now suppose that there is an increase in the price level. this will lead to _____ in the equilibrium quantity of money and _____ in the equilibrium interest rate.
Select one:
a. a decrease; a rise
b. no change; a rise
c. no change; a fall
d. an increase; a fall
Please explain
Chapter 26 Solutions
Principles of Economics (12th Edition)
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- What shifts on the graph provided? 1st Blank options are greater or less 2nd Blank options are increase or decrease 3rd Blank options are buy or sell 4th Blank options are have to offer higher or can offer lower 5th Blank what's the interest rate?arrow_forwardSuppose there is an increase in money demand because of a stock market boom that raises people’s wealth. Draw the money market model to show the stock market boom impact on the interest rate. Will investment and consumption increase or decrease because of this event? What should Fed do if it wants to maintain the original interest rate? Show the impact of the Fed’s action in the graph of part a. Will investment and consumption still change if the Fed takes its action?arrow_forwardSuppose the Federal Reserve shifts to an expansionary monetary policy by buying bonds through open-market operations. This problem will work through the short-run effects of this move according to the Keynesian transmission mechanism. The following graph shows the money demand and money supply curves. As a result of the Fed's policy, the Interest rate to Adjust the following graph to show the effect of the Fed's expansionary monetary policy. 200 1500 INTEREST RATEarrow_forward
- economic Illustrate each of the following situations with a graph showing the IS curve and the Fed rule, and explain what happens to the equilibrium values of the interest rate and output: a. An increase in G with the money supply held constant by the fed b. A decrease in Z with no change in Government soending PLEASE SHOW GRAPHarrow_forwardWhen the Federal Reserve buys government securities from a bank, the money supply ________ and interest rates ________. increases; rise decreases; rise decreases; fall increases; fallarrow_forwardPart (i) of the figure shows the money market and the effect of a decrease in the supply of money. The corresponding sequence of events in the bond market is as follows: The ________ of money at i0 leads firms and households to ________ bonds, which leads to a(n) ________ in the price of bonds and an increase in the interest rate. A. excess supply; buy; decrease B. excess demand;sell;decrease C. excess supply;buy;increase D. excess demand; sell; increasearrow_forward
- The following table gives the quantity of money demanded at various price levels (P), the money demand schedule. In the following table, fill in the column labeled Value of Money. Quantity of Money Demanded Price Level (P) Value of Money (1/P) 1.00 1.00 (Billions of dollars) 2.0 1.33 0.75 2.00 0.50 4.00 0.25 2.5 4.0 8.0 ما Now consider the relationship between the quantity of money that people demand and the price level. The lower the price level, the less required to complete transactions, and the more money people will want to hold in the form of currency or demand deposits. moneyarrow_forwardNonearrow_forwardA) an interest rate is the “price” of money, similar to how a wage is the “price” of labor. If the Federal Reserve reduces the supply of money, what happens to the interest rate? Graph a supply and demand function showing both equilibria of the quantity of money & the price of money (the interest rate) before and after the FED reduces money supply.arrow_forward
- Assume that an economy is experiencing an economic contraction and the government decides to reduce taxes and increase government spending to stimulate the economy. By the way, Central Bank keeps money supply constant. i) Evaluate the effect of this policy on the a) Interest Rate , b)Money Demand (in the SHORT-RUN.) Explain and show your answer on the graph. ii)Evaluate the effect of this policy on output and price Level (in the LONG-RUN.) Explain and show your answer on the graph. Note : In figures, please label the axis and show the changes on the graphs using arrows.arrow_forwardQuestion 23 Figure 35-4 INTEREST RATE 552 MS QUANTITY OF MONEY MD, MD Refer to Figure 35-4. Suppose the current equilibrium interest rate is . If the Federal Reserve increases the money supply, and the price level does not change, о there will be an increase in the equilibrium quantity of goods and services demanded. there will be a decrease in the equilibrium quantity of goods and services demanded. there will be an increase in the equilibrium interest rate. fewer firms will choose to borrow to build new factories and buy new equipment. 1 ptsarrow_forwardAssume the following money demand function: Md = PY (0.35 - ) The income is € 100. Suppose further that the bid offer is € 20. There is equilibrium in the money market and the financial markets. a. What is the interest rate? b. If the central bank wants to increase the interest rate i by 10 percentage points (for example from 2% to 12%), how should it choose the money supply?arrow_forward
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