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 5.1P
To determine
Graphical illustration of changes in aggregate demand and supply curve.
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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
A
Money Demand
New MS Curve
4.5
4.0
3.5
3.0
2.5
20
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 25 basis points, or 0.25 percentage points. To do this, the Fed will use open-
market operations to
money by
the
the public.
According to Keynes, increasing the money supply should lower interest rates in the economy. Milton Friedman notes that while it is true that expansionary monetary policy can lower interest rates, it is only part of the story.
a. Briefly explain under what conditions an expansionary monetary policy will indeed lower interest rates, both in the short and long run. A graph may help answering this question.b. Briefly explain under what conditions an expansionary monetary policy will increase interest rates. A graph may help answering this question.
The mandate of the South African Reserve Bank (SARB) states that “the Reserve Bank is required to achieve and maintain price stability in the interest of balanced and sustainable economic growth in South Africa”.
There are several macroeconomic determinants that in many ways affect the outlook of the economy, such as inflation, growth, interest rates, unemployment and exchange rates. There has been an ongoing conversation among economists and politicians about the mandate of the SARB.
Do you think that the mandate of the SARB should change? Support your view.
Chapter 26 Solutions
Principles of Economics (12th Edition)
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