blanks to interpret the effect of the Fed's policy. When the Fed sells bonds, the amount of money in circulation in the economy decreases drives interest rates up, which causes businesses to invest . This new factories and upgraded equipment. The result is a decrease in capital improvements like in the equilibrium price level, and in aggregate demand, in the equilibrium level of Real GDP.
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- 2. Money supply, money demand, and adjustment to monetary equilibrium 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) (Billions of dollars) 1.00 1.00 1.33 0.75 2.00 0.50 4.00 0.25 1.5 2.0 3.5 7.0 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 less money people will want to hold in the form of currency or demand deposits. Assume that the Federal Reserve initially fixes the quantity of money supplied at $3.5 billion. Use the orange line (square symbol) to plot the initial money supply (MS₁) set by the Fed. Then, referring to the previous table, use the blue connected points (circle symbol) to graph the money demand curve. moneyWhat would be the effect of an increase in money supply on aggregate demand, GDP and inflation ? Use appropriate diagram (s) to illustrate and explain your answer.Suppose the Federal Reserve shifts to an expansionary monetary policy by buying bonds through open-market operations. This problem will work through the short-run effects of this move according to the Keynesian transmission mechanism. The following graph shows the money demand and money supply curves. As a result of the Fed's policy, the Interest rate to Adjust the following graph to show the effect of the Fed's expansionary monetary policy. 200 1500 INTEREST RATE
- Time remaining: 00 :09 :06 Economics If there is an inflationary gap, what should the Fed do? Explain, provide name, and show in i-M space. Consider the following macroeconomy, with fixed prices (all amounts are in millions of $): YFE = 7000 C = 40 + 0.9 YD I = 500 G = 250 T = 40 a. Calculate eqm Y in this model and then graph it in the Keynesian-cross diagram. Indicate and provide the name and size of the gap, if any. b. Prove that the appropriate relationship between I and various types of Savings holds at eqm. c. What two different policies could Congress enact? You must calculate the exact changes in the appropriate variables and provide the appropriate name(s) for the(se) policies. Graph each of these policies in the Keynesian-cross diagram. Show what your policies would do, if anything, in the money-market diagram, (in i- M space) cet. par. Indicate the initial disequilibrium and explain what will happen and why. d. Go back to the original eqm in part a. Now…Show the impact of the increase in government purchases on the interest rate by shifting one or both of the curves on the following graph. INTEREST RATE 12 10 8 2 0 0 20 Money Supply known as the Money Demand 40 60 80 MONEY (Billions of dollars) 100 120 = Money Demand Money Supply ? Suppose that for every increase in the interest rate of one percentage point, the level of investment spending declines by $0.5 billion. Based on the changes made to the money market in the previous scenario, the new interest rate causes the level of investment spending to by Taking the multiplier effect into account, the change in investment spending will cause the quantity of output demanded to by at every price level. The impact of an increase in government purchases on the interest rate and the level of investment spending is effect. Use the purple line (diamond symbol) on the graph at the beginning of this problem to show the aggregate demand curve (AD3) after accounting for the impact of the increase…Fill in the Value of Money column in the following table. Quantity of Money Demanded (Billions of dollars) Price Level (P) Value of Money (1/P) 1.00 1.5 1.33 2.0 2.00 3.5 4.00 7.0 Now consider the relationship between the price level and the quantity of money that people demand. The lower the price level, the money the typical transaction requires, and the money people will wish to hold in the form of currency or demand deposits. Assume that the Fed initially fixes the quantity of money supplied at $3.5 billion. Use the orange line (square symbol) to plot the initial money supply (MS,) set by the Fed. Then, referring to the previous table, use the blue connected points (circle symbol) to graph the money demand curve.
- Assume the Federal Reserve triples the growth rate of the quantity of money in circulation. In the long run, this increase in money growth will affect which of the following? Check all that apply. PRICE LEVEL Suppose when unemployment is at its natural rate the economy produces a level of real GDP equal to $70 billion. 132 Using the purple points (diamond symbol) plot the economy's long-run aggregate supply (LRAS) curve on the graph. 128 124 120 The price level 116 The quantity of physical capital The level of technological knowledge 108 The inflation rate 10 20 8 50 710 80 8:0 100 LRAS MShow the impact of the increase in government purchases on the interest rate by shifting one or both of the curves on the following graph. INTEREST RATE 100 5 m 2 1 0 0 5 Money Supply Money Demand 10 15 20 MONEY (Billions of dollars) 25 30 Money Demand Money Supply (?)To https://aplia.apps.ng.cengage.com/ar/serviet/quiz?cx=bkhana-0031&quiz_action=takeQuiz&quiz_probGuid=... The following graph shows a decrease in short-run aggregate supply (AS) in a hypothetical economy where the currency is the dollar. Specifically, the short-run aggregate supply curve shifts to the left from AS₁ to AS2, causing the quantity of output supplied at a price level of 100 to fall from $200 billion to $150 billion. ? 200 AS 175 AS₁ 150 125 100 75 50 25 0 PRICE LEVEL 0 50 300 200 250 QUANTITY OF OUTPUT 100 150 350 400 Yo
- Suppose the economy begins at full employment. Label this starting point as point "1." Then, suppose that, due to increased instability in the financial markets, a decrease in investor and consumer confidence occurs. Show the effects on your graph and label the new equilibrium point "2." Lastly, suppose the Federal Reserve wants the economy to return to full-employment as quickly as possible. Should the Fed intervene? If so, show the impact of successful monetary policy on your graph. Label this new equilibrium point "3."Assume the Federal Reserve triples the growth rate of the quantity of money in circulation. In the long run, this increase in money growth will affect which of the following? Check all that apply. Suppose when unemployment is at its natural rate the economy produces a level of real GDP equal to $50 billion. Using the purple points (diamond symbol) plot the economy's long-run aggregate supply (LRAS) curve on the graph. 132 128 124 120 116 112 108 The inflation rate The quantity of physical capital The size of the labor force The price level 104 100 0 10 20 30 40 50 60 70 OUTPUT (Billions of dollars) 80 90 100 LRAS (?) Suppose now the government passes a law that reduces unemployment benefits in a way that causes unemployed workers to seek out new jobs more quickly. This change in policy will cause the natural rate of unemployment to , which will: Shift the long-run aggregate supply curve to the left Not impact the long-run aggregate supply curve Shift the long-run aggregate supply curve…Suppose that, initially, the economy is operating in an inflationary gap and that the Federal Reserve (the Fed") pursues a contractionary monetary policy to close the gap. Assume that natural real GOP equals $2 trillion. The following graph shows the supply ($) and demand (D) curves in the money market. Adjust the graph to show the effect of the contractionary monetary policy. QUANTITY OF MONEY INTEREST RATE