Answered: Suppose there is an increase in money…

Brief Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter16: The Influence Of Monetary And Fiscal Policy On Aggregate Demand

Section16.3: Using Policy To Stabilize The Economy

Problem 3QQ

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Question

Suppose there is an increase in money demand because of a stock market boom that raises people’s wealth.

Draw the money market model to show the stock market boom impact on the interest rate. Will investment and consumption increase or decrease because of this event?

What should Fed do if it wants to maintain the original interest rate? Show the impact of the Fed’s action in the graph of part a. Will investment and consumption still change if the Fed takes its action?

Definition Definition Financial market that deals in securities or assets that are short-term in nature. The money market is responsible for keeping up the liquidity of the businesses and the organizations. These securities are usually held for a period of 12 months or less and are issued by institutions that require cash or funds for their short-term cash flow requirements. The money market is regulated by the federal government.

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