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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- A) 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_forwardAssume 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_forward
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