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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Question
Chapter 32, Problem 2.2P
To determine
The impact on nominal income and real income.
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Students have asked these similar questions
MS, MS,
MD
М, м,
QUANTITY
OF MONEY
The graph above shows a decrease in the money
supply. Which of the following is consistent with this
change?
Contractionary Fiscal Policy is used to
reduce income and increase Inflation
Contractionary Monetary Policy is used to
increase interest rates and decrease
Inflation
Expansionary Fiscal Policy is used to
decrease income and decrease Inflation
Expansionary Monetary Policy is used to
lower interest rates and decrease Inflation
NOMINAL
* INTEREST RATE
Draw a graph with the quantity of money on the horizontal axis and the interest rate on the vertical axis. Initially, the
money supply curve is vertical because its determined by the Fed. The demand for money curve slopes downward,
indicating the negative relationship between the interest rate and the quantity of money demanded.
There are several factors that influence money demand. Explain the effects of the following influences on money demand:
A decrease in income.
An increase in interest rates.
An increase in inflation.
A decrease in credit availability.
Chapter 32 Solutions
Principles of Economics (12th Edition)
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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?arrow_forwardA 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.arrow_forwardAccording to John Maynard Keynes, Answer the demand for money in a country is determined entirely by that nation’s central bank. the supply of money in a country is determined by the overall wealth of the citizens of that country. the interest rate adjusts to balance the supply of, and demand for, money. the interest rate adjusts to balance the supply of, and demand for, goods and services. Question 34 While a television news reporter might state that “Today the Fed lowered the federal funds rate from 5.5 percent to 5.25 percent,” a more precise account of the Fed’s action would be as follows: Answer “Today the Fed told its bond traders to conduct open-market operations in such a way that the equilibrium federal funds rate would decrease to 5.25 percent.” “Today the Fed lowered the discount rate by a quarter of a percentage point, and this action will force the federal funds rate to drop by the same amount.” “Today the Fed took steps to decrease the money supply by an amount that is…arrow_forward
- Draw a graph of the money market. Show the effect on the money demand curve, the money supply curve, and the equilibrium short-term nominal interest rate of each of the following: a. The Fed decreases the money supply. b. A recession causes real GDP to fall. c. The price level increases. d. The Fed increases the money supply at the same time that the price level falls.arrow_forward5- Interest rate (percent per year). 4- 3+ 2.8 MD 3.2 2.9 3.0 3.1 Real money (trillions of 2009 dollars) >>> Draw only the objects specified in the question. Qarrow_forwardInflation in the UK, Europe and in the United States has remained relatively low in recent years - despite so much new money being pumped into these economies resulting from Quantitative Easing. For whatever reason, money supply growth in most countries no longer tracks the consumer price index in any meaningful way. Some economists have suggested that this is evidence that monetarism is dead. Explain the meaning of Quantitative Easing and monetarism? Do you agree that monetarism is dead? Why?arrow_forward
- 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 4.2arrow_forwardAccording to Monetarists, what should the government do if unemployment is 4% and inflation is 12%? Select one: a. Decrease the supply of money b. Decrease government spending c. Raise taxes d. Do nothing e. Lower interest ratesarrow_forwardMilton Friedman, the leader for Monetarism had proposed several important arguments regarding the implementation of Monetary Policy. The arguments were listed as: Proposition 1: Monetary Policy has powerful short-run effects on the real economy. In the long run, however, changes in the money supply have their primary effect on the price level. Proposition 2: Despite the powerful short-run effect of money on the economy, there is little scope for using Monetary Policy actively to try to smooth business cycle. Proposition 3: Even if there is some scope for using Monetary Policy to smooth business cycles, the Central Bank (the Federal Reserve) cannot be relied on to do so effectively. Proposition 4: The Central Bank (the Federal Reserve) should choose a specific monetary aggregate (such as M1 or M2) and commit itself to making that aggregate grow at a fixed percentage rate, year in and year out. Keynesians economists’ response to the above propositions with this statement: “Monetary…arrow_forward
- Most central banks, like the Bank of England, set targets for their economy's inflation rate. The Bank of England has an inflation target of 3.5% per year. According to the Quantity Theory of Money, by how much must the Bank of England grow the money stock in order to hit its inflation target? The Bank of England must decrease the money stock by 3.5% per year. The Bank of England must increase the money stock by 3.5% per year. The Bank of England must decrease the money stock by 3.5% per month. The Bank of England must increase the money stock by 3.5% per month.arrow_forwardUse the following graph to answer the next question. Interest Rate (percent) Ms3 B Mss C A F M₁ Money Ms2 D G H M₂ Mo.2 Mos My The graph shows the supply and des 1 for money where Mo,1. MD,2. and Mp3 1 resent different demands for money and Ms 1. Ms,2. and Ms,3 represent different levels of the money supply. The initial equilibrium point is A. What will be the new equilibrium point following a decrease in the transactions demand for money? Mp3arrow_forwardYou have been tasked with advising the dictator of a nation over what he should do to increase the countries GDP. He suggests printing money and increasing the growth rate of the money supply. He wants to give this newly printed currency to his soldiers and best political supporters. You know this will not increase GDP in the long run because... I. Money is neutral II. Increasing the growth of the money supply only causes inflation in the long run III. He would only increase GDP in the long run if he distributed the money equally to all citizens IV. He would only increase GDP in the long run only if he printed a large enough sum of money I, II, and III only I, II, III, and IV III only I and II onlyarrow_forward
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