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Economics: Principles & Policy
14th Edition
ISBN: 9781337696326
Author: William J. Baumol; Alan S. Blinder; John L. Solow
Publisher: Cengage Learning
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Question
Chapter 28, Problem 5DQ
To determine
The multiple contraction of money due to an increase in the holdings of cash.
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Students have asked these similar questions
An increase in the money supply is likely to decrease:
1) Prices
2) Nominal income
3) Money demand
4) Interest rates
Suppose the Federal Reserve conducts an open market purchase from a bank for
$300 million. Assuming the required reserve ratio is 10%, what would be the effect on
the money supply in each of the following situations?
If there are many banks, all of which make loans for the full amount of their excess
reserves, the money supply will increase by $ million. (Enter your response as a
whole number.)
Based on Keynesian economic theory, which of the following will occur if the Central Bank increases the money supply?
Select one:
The price level will rise while the real rate of interest and the level of investment remains unchanged
The real rate of interest will fall and as such investment will increase
Aggregate demand will fall as prices rise
The nominal rate of interest will fall but the real rate of interest will also fall as the price level falls. As a result, investment remains unchanged
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Economics: Principles & Policy
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- Determine whether the statement is TRUE or FALSE based on the concept of money supply. “If a commercial bank receives a currency deposit, cash is taken out of circulation. Thus, there will be a decrease of money supply.”arrow_forwardThe following graph shows an increase in the demand for money from 2023 (MD2023) to 2024 (MD2024) caused by an increase in the price level. The initial equilibrium interest rate in 2023 was Now suppose the Bank of Canada chooses not to alter the money supply between 2023 and 2024. On the following graph, use the grey point (star symbol) to illustrate the equilibrium interest rate and quantity of money that would result from this lack of intervention. NOMINAL INTEREST RATE (Percent) 6.75 6.50 6.25 6.00 5.75 5.50 5.25 5.00 4.75 Money Supply 0.9 1.0 1.1 1.2 1.3 1.4 QUANTITY OF MONEY (Trillions of dollars) 1.5 MD MD, 2024 2023 No Intervention New MS Curve With Intervention (?)arrow_forwardBased on the analysis presented in this week's lectures, the following actions can increse the total Money Supply (M1) in the economy, EXCEPT: Increase in Monetary Base (Mo) Expansion of Excess Reserves Reduction of Reserve Requirements (RR) Increase in Bank Deposits (Do)arrow_forward
- Assume the supply of money is fixed by the authorities.arrow_forwardHey, I need help with the following macro question. Thank you in advance! According to the quantity theory of money, what must the growth rate of the money supply be given the following information? The growth rate of real GDP is 6.4% The growth rate of nominal GDP is 7.8% The nominal interest rate is 4.2% The real interest rate is 2.8% The money supply (M2) is $11,438 (in billions) Use the information given above to calculate the inflation rate.arrow_forwardWhich of the following statements help to explain why, in the real world, the Fed cannot precisely control the money supply? Check all that apply. The Fed cannot prevent banks from lending out required reserves. The Fed cannot control whether and to what extent banks hold excess reserves. The Fed cannot control the amount of money that households choose to hold as currency.arrow_forward
- 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…arrow_forwardMoney serves three functions in the economy: medium of exchange, unit of account, and store of value. Which of the following statements describes how inflation affects the ability of money to serve as a unit of account? Check all that apply. Inflation erodes money's purchasing power. In some countries with hyperinflation, prices are posted in terms of U.S. dollars rather than the local currency, even though the local currency is still used to purchase the good. Inflation causes menu costs.arrow_forwardEquilibrium and disequilibrium in the money market The following diagram represents the money market in the United States, which is currently in equilibrium, as indicated by the grey star. Suppose the Federal Reserve (the Fed) announces that it is raising its target interest rate by 25 basis points, or 0.25%. It would achieve this by decrease increase the money supply money demand . Use the green line (triangle symbols) on the preceding graph to illustrate the effects of this policy. Place the black point (plus symbol) on the graph to indicate the new equilibrium interest rate and quantity of money. The sequence of events that results in a new equilibrium interest rate, after the Fed makes the change you selected, may be described as follows: Because there is more less money in the financial system, the quantity of money demanded increases decreases , which means that bond issuers can issue bonds at lower interest rates and still…arrow_forward
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