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Question 4
Explain the Keynesian transmission mechanism, and use graphs to illustrate.
Suppose that there is an increase in the demand for money. Explain fully how this changes the equilibrium interest rate and
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- The diagram on the right shows the demand for money curve in a hypothetical economy. Suppose that the economy is initially at point E. Suppose that due to changes in expectations in the financial markets, the quantity of money demanded increases because of speculative reasons. This change would be associated with a movement from E to point EB C Interest Rate % EB Eo EA Quantity of Money MD (Y,P)Explain the relationship between the effectiveness of monetary policy and the interest elasticity of investment. Will the monetary policy be more or less effective the higher the interest elasticity of investment demand?Money Market - This graph shows the relationship between the supply and demand for money in the economy. It is used to explain the determinants of interest rates, and to illustrate the effects of various policy interventions, such as changes in monetary policy or changes in the money supply. show this with a graph please.
- Graphically illustrate and explain what effect an increase in real income will have on the money market.A. Explain the Keynesian transmission mechanism, and use graphs to illustrate B. Suppose that there is an increase in the demand for money. Explain fully how this changes the equilibrium interest rate and GDP Use graphs to illustrate."According to Keynesian theory, an increase in the money supply can cause interest rates to fall without affecting nominal income. In this case, how does the velocity of money change? Explain and demonstrate using the money market graph."
- 1. For each of the following questions, draw the Money Demand curve (MD) and Money Supply curve (MS) and label the equilibrium interest rate as i*. Also show how the MS- MD graph changes due to the given events and as a result how the equilibrium interest rate changes. (In your answer you should clearly state and show what happens to the MS and MD curves and also what happens to the interest rate). a) The Fed lowers the RRR b) Taxes decreaseQUESTION 4 A. Explain the Keynesian transmission mechanism, and use graphs to illustrate. B. Suppose that there is an increase in the demand for money. Explain fully how this changes the equilibrium interest rate and GDP. Use graphs to illustrate.Please complete the two attached graphs and answer the following questions for this. A. Suppose that for every increase in the interest rate of one percentage point, the level of investment spending declines by $2.5 billion. Based on the changes made to the money market in the previous scenario, would the new interest rate causes the level of investment spending to Rise or Fall? And by $1.02 billion, $0.62 billion, or $2.5 billion? B. Taking the multiplier effect into account, will the change in investment spending cause the quantity of output demanded to decrease or increase? And $1.2, $2, or $5 billion at every price level? C. The impact of an increase in government purchases on the interest rate and the level of investment spending is known as the crowding out, automatic stabilizer, multiplier, or liquidity preference effect?
- Homework (Ch 21) Consider a hypothetical economy in which households spend $0.50 of each additional dollar they earn and save the remaining $0.50. The following graph shows the economy's initial aggregate demand curve (AD₁). Suppose the government increases its purchases by $3 billion. Use the green line (triangle symbol) on the following graph to show the aggregate demand curve (AD2) after the multiplier effect takes place. Hint: Be sure the new aggregate demand curve (AD2) is parallel to AD₁. You can see the slope of AD₁ by selecting it on the following graph. PRICE LEVEL 116 114 112 110 108 106 104 102 100 100 AD1 102 112 104 106 108 110 OUTPUT (Billions of dollars) 114 116 AD₂ AD 3Suppose that the government decides to increase government expenditure. a) Is this a fiscal or a monetary policy? b) Is this an expansionary or a contractionary policy? c) How will the equilibrium output and interest rate change in goods and money markets, respectively. Explain using the diagrams.Economics Suppose that the government conducts expansionary fiscal policy and increases spending to 200. What will be the effect on the economy? Assuming central bank 1)hold interest rate at 0.1 and 2) allow the interest rate to change. Illustrate your answer with a IS-LM graph and explain.