Principles of Economics, 7th Edition (MindTap Course List)
7th Edition
ISBN: 9781285165875
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Question
Chapter 34, Problem 6PA
Subpart (a):
To determine
Demand and supply model resulting from a new legislation.
Subpart (b):
To determine
Demand and supply model resulting from a new legislation.
Subpart (c):
To determine
Demand and supply model resulting from a new legislation.
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The following graph shows the money market in a hypothetical economy. The central bank in this economy is called the Fed. Assume that the Fed fixes
the quantity of money supplied.
Suppose the price level increases from 150 to 175.
Shift the appropriate curve on the graph to show the impact of an increase in the overall price level on the market for money.
INTEREST RATE (Percent)
18
15
12
60
3
0
0
15
Money Supply
Money Demand
30
45
60
MONEY (Billions of dollars)
75
90
Money Demand
Money Supply
(?)
After the increase in the price level, the quantity of money demanded at the initial interest rate of 9% will be
supplied by the Fed at this interest rate. People will try to
other interest-bearing assets, and bond issuers will find that they
equilibrium at an interest rate of
%
than the quantity of money
bonds and
interest rates until the money market reaches its new
their money holdings. In order to do so, people will
Changes to both the money supply and the velocity of money include changes in aggregate demand. However, the long-run impacts of changes in these variables are different. How are the effects of an increase in the velocity of money and the effects of an increase in the money supply different?
The following table gives the quantity of money demanded at various price levels (P), the money demand schedule.
In the following table, fill in the column labeled Value of Money.
Quantity of Money Demanded
Price Level (P)
Value of Money (1/P)
1.00
1.00
(Billions of dollars)
2.0
1.33
0.75
2.00
0.50
4.00
0.25
2.5
4.0
8.0
ما
Now consider the relationship between the quantity of money that people demand and the price level. The lower the price level, the less
required to complete transactions, and the more money people will want to hold in the form of currency or demand deposits.
money
Chapter 34 Solutions
Principles of Economics, 7th Edition (MindTap Course List)
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