Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134078779
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Question
Chapter 26, Problem 5.1P
To determine
Graphical illustration of changes in aggregate
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
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.
A problem that the Fed faces when it attempts to control the money supply is that
the Fed can only control excess reserves but not total reserves.
the Fed has to get the approval of the U.S. Treasury Department whenever it uses any of its monetary policy tools.
the Fed does not have a tool that it can use to change the money supply by either a small amount or a large amount.
the Fed does not control the amount of money that households choose to hold as deposits in banks.
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.
Chapter 26 Solutions
Principles of Economics (12th Edition)
Knowledge Booster
Similar questions
- Use the graph to answer the question that follows. Real GDP Potential real GDP T5 Time The government of Country 'X' is operating at point 'C' in T3. Which of the following events would move the economy from point 'C' to 'D'? Sharp rise in unemployment rate Increase in money supply Decrease in interest rates Rise in aggregate demand Decrease in import Actual real GDParrow_forwardIn 1989 the Government made it legal for banks to offer interest on checking accounts. Before this it was illegal because it could create increased competitiveness between banks and maybe lead to bank failures. Using only the asset market show graphically what we would expect to happen to the quantity of money and the interest rates if it became legal for banks to offer interest bearing checking accounts. What would this do to the overall economy? Why? How would the Federal Reserve (using information from class) stabilize the economy?arrow_forwardFor this discussion I want you to think of an item (a piece of capital) that a firm could invest in to make profit. The purpose of this discussion is to help understand how the process of commercial banks making loans to firms increases the money supply. In the textbook it seems like the process of banks making loans and firms paying those loans back happens instantaneously. However, in reality that process takes time (several years). Typically, loans are re-paid over 10, 15, or even 30 years. The firms use profits from new business opportunities, opportunities they would not have had without the loan, to repay the bank over time. Describe a piece of capital a company might want to purchase by taking out a loan from a bank. Explain how having this new piece of capital would improve profits for the firm. How does the real interest rate impact the firm’s decision to take out the loan? How does the corporate tax rate impact the firm’s decision to take out the loan? Example: A chef, who…arrow_forward
- Suppose the economy begins at full employment. Label this starting point as point "1." Then, suppose that the minimum wage increases to $15 in the United States, which affects the entire labor market and increases the cost of production. Show the effects on your graph and label the new equilibrium point "2." Lastly, suppose the Federal Reserve wants to keep prices in the economy as low as possible. Should the Fed intervene? If so, show the impact of successful monetary policy on your graph. Label this new equilibrium point "3."arrow_forwardEconomics Suppose that a large bank borrowed $1 billion from the Federal Reserve for one week. How would this change the monetary base? If the Federal Reserve did not want the monetary base to change, what would it do? Explain your reasoning.arrow_forwardPrice level 120 Tools AS 110 AD, AD, AD AD AD New CDP 100 94 90 80 70 500 600 700 800 900 1000 Real domestic product, GDP (billions of dollars) a. Use the graph above to show the economy's new level of real GDP. Instructions: Use the tool provided New GDP to plot a point that shows the economy's new level of real GDP. b. According to the results of your graph, the central bank reduced the money supply by too mucharrow_forward
- After a series of measures to remedy the mortgage crisis that has beset the US economy, Ben Bernanke, chairman of the Board of Governors of the Federal Reserve and his colleagues are once again looking at cutting the central bank’s key interest rate as they hope that lowering the interest rates will give the economy a boost by encouraging investors and consumers to borrow and spend (Associated Press, n. pag.). The Fed is looking at slashing the interest rate by a full percent however, many economist believe that this is not the appropriate remedy for economic conundrum (Gavin, n. pag). According to many analysts, the issue of the economy regarding the mortgage is the lack of confidence by both the lender and the borrower. Even as the Fed resorts to drastic interest cuts, the first time the central bank has cut a full percentage point in one shot since 1982, this provides little help if lenders are not loaning money out of fear they will not be repaid and the borrowers…arrow_forwardSuppose the economy is initially at long run equilibrium, when there is an unexpected decrease in oil prices in the country.How does this impact the economy? (write out either "inflationary" or "recessionary" In response to this what monetary policy would the Fed employ? (write one of the following: "raise taxes", "lower taxes", "raise money supply", or "lower money supply"What is the most likely way the Fed will accomplish this change in the monetary policy? (write one of the following: "buy securities", "sell securities", "raise discount rate", "lower discount rate", or "legislation"This action by the Fed will cause interest rates to _______. (Write out "increase" or "decrease"The end result of the monetary policy is a shift of which curve in which direction. (Write out one of the following: "AD right", "AD left" "AS left", "AS right"arrow_forward"Animal spirits"—optimism about and predictions for the current and future state of markets—can fuel increased spending on things like homes and financial instruments, even when those "spirits" are not based on concrete information. If the Federal Reserve or other government entities feel that increased spending on real estate isn't merited by actual economic conditions and is leading to an asset price bubble, in your opinion, should they intervene? It depends on how certain the government is that a price bubble exists or will exist. No. The government should not tell people how to spend their money. It depends. If the information is exclusive to the government, it should share it. But if the information is publicly available, the government should stay hands-off. Yes. The government has an obligation to step in whenever it can assist with things like price bubbles.arrow_forward
- PRICE LEVEL INTEREST RATE (Percent) 4.0 5. 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 5.5% and a quantity of money equal to $0.4 trillion, designated on the graph by the grey star symbol. 7.5 7.0 Money Demand 35 0.1 02 Money Supply 04 05 06 0.7 0.0 03 MONEY (Trio of dox) New MS Curve + 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 the new money supply…arrow_forwardHomework Question 22: Hyperdeflation Can Be a Bit Cryptic to Understand Bitcoin is an electronic currency, which means that instead of having physical notes and coins, the currency only exists online. Bitcoins are unique in that there is no entity or individual that can increase the supply of Bitcoins. Instead Bitcoins are created by a computer algorithm that currently adds a fixed number of Bitcoins into circulation every hour, the algorithm is designed to gradually reduce the number of Bitcoins being produced, eventually reaching a growth rate of zero in 2040. You have been given the task of thinking about the potential for Bitcoin to become widely Only a small group of online vendors initially accepted Bitcoin but more and more are accepting it over time in other words the volume of goods and services that can be purchased with Bitcoin has been rising rapidly. a) Reformulate the Quantity Theory of Money to apply to Bitcoin, i.e define what M, P, V and Y are in the context of…arrow_forwardIf the Fed lowers interest rates, that is an example ofarrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Economics (MindTap Course List)EconomicsISBN:9781337617383Author:Roger A. ArnoldPublisher:Cengage Learning
Economics (MindTap Course List)
Economics
ISBN:9781337617383
Author:Roger A. Arnold
Publisher:Cengage Learning