Suppose the money market for some hypothetical economy is given by the following graph, which plots the money demand and money supply curves. Assume the central bank in this economy (the Fed) fixes the quantity of money supplied. Suppose the price level increases from 90 to 105. Shift the appropriate curve on the graph to show the impact of an increase in the overall price level on the market for money. Following the price level increase, the quantity of money demanded at the initial interest rate of 6% will be (greater/less)than the quantity of money supplied by the Fed at this interest rate. As a result, individuals will attempt to (increase/decrease) their money holdings. In order to do so, they will (buy/sell) bonds and other interest-bearing assets, and bond issuers will realize that they (have to offer higher/can offer lower) interest rates until equilibrium is restored in the money market at an interest rate of ______%. The following graph plots the aggregate demand curve for this economy. Show the impact of the increase in the price level by moving the point along the curve or shifting the curve. The change in the interest rate found in the previous task will lead to a (rise/fall) in residential and business spending, which will cause (an increase/a decrease) in the quantity of output demanded in the economy.

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter15: Monetary Theory And Policy

Section: Chapter Questions

Problem 1.2P

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Suppose the money market for some hypothetical economy is given by the following graph, which plots the money demand and money supply curves. Assume the central bank in this economy (the Fed) fixes the quantity of money supplied.

Suppose the price level increases from 90 to 105.

Shift the appropriate curve on the graph to show the impact of an increase in the overall price level on the market for money.

Following the price level increase, the quantity of money demanded at the initial interest rate of 6% will be (greater/less)than the quantity of money supplied by the Fed at this interest rate. As a result, individuals will attempt to (increase/decrease) their money holdings. In order to do so, they will (buy/sell) bonds and other interest-bearing assets, and bond issuers will realize that they (have to offer higher/can offer lower) interest rates until equilibrium is restored in the money market at an interest rate of ______%.

The following graph plots the aggregate demand curve for this economy.

Show the impact of the increase in the price level by moving the point along the curve or shifting the curve.

The change in the interest rate found in the previous task will lead to a (rise/fall) in residential and business spending, which will cause (an increase/a decrease) in the quantity of output demanded in the economy.

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)
12
10
2
0
20
Money Supply
Money Demand
40
60
80
MONEY (Billions of dollars)
100
120
Money Demand
Money Supply
?

Show the impact of the increase in the price level by moving the point along the curve or shifting the curve.
PRICE LEVEL
180
150
120
90
60
30
0
0
|
40
O
Aggregate Demand
80
120
160
OUTPUT (Billions of dollars)
200
240
Aggregate Demand
?

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