Use the table below for the next set of questions. Column 1 shows the interest rate, column 2 shows the demand for money, and columns 3–5 show the supply of money. All quantities are in millions ($). (1) Interest rate (2) Dm (3) Sm1 (4) Sm2 (5) Sm3 10% $1500 $2200 $2500 $1800 8 1800 2200 2500 1800 6 2200 2200 2500 1800 4 2500 2200 2500 1800 2 2800 2200 2500 1800 (a)Given the demand for money, what will the equilibrium interest rate be for each of the different supply of money schedules? (b)Assume the economy was in equilibrium at Dm and Sm1. If the FED decides to change the money supply to Sm2 and the interest rate stays the same, how much of a shortage or surplus in the money supply will there be? Describe what will happen in the money market and the bond market to eliminate the surplus or shortage and restore a new equilibrium interest rate. (c)Assume the economy was in equilibrium at Dm and Sm1. If the FED decides to change the money supply to Sm3 and the interest rate stays the same, how much of a shortage or surplus in the money supply will there be? Describe what will happen in this money market and the bond market to eliminate the surplus or shortage of money and restore a new equilibrium interest rate.

Economics Today and Tomorrow, Student Edition

1st Edition

ISBN:9780078747663

Author:McGraw-Hill

Publisher:McGraw-Hill

Chapter4: Going Into Debt

Section: Chapter Questions

Problem 29AA

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12. Use the table below for the next set of questions. Column 1 shows the interest rate, column 2 shows the demand for money, and columns 3–5 show the supply of money. All quantities are in millions ($).

(1) Interest rate	(2) D_m	(3) S_m1	(4) S_m2	(5) S_m3
10%	$1500	$2200	$2500	$1800
8	1800	2200	2500	1800
6	2200	2200	2500	1800
4	2500	2200	2500	1800
2	2800	2200	2500	1800

(a)Given the demand for money, what will the equilibrium interest rate be for each of the different supply of money schedules?

(b)Assume the economy was in equilibrium at D_m and S_m1. If the FED decides to change the money supply to S_m2 and the interest rate stays the same, how much of a shortage or surplus in the money supply will there be? Describe what will happen in the money market and the bond market to eliminate the surplus or shortage and restore a new equilibrium interest rate.

(c)Assume the economy was in equilibrium at D_m and S_m1. If the FED decides to change the money supply to S_m3 and the interest rate stays the same, how much of a shortage or surplus in the money supply will there be? Describe what will happen in this money market and the bond market to eliminate the surplus or shortage of money and restore a new equilibrium interest rate.

13.Answer the next two questions using the following information: The price of a bond with no expiration date is $1000 and its fixed annual interest payment is $50; bond annual rate of interest is 5%.

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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