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- Suppose commercial Bank A receives a new $100 deposit. a. What will be the total change in money supply as the result of this increase in deposits? Explain in detail. b. Discuss any ONE reason why the total change in money supply can be less that your answer in part a). (Think about what does the change in money supply depends on).6) State how each of the following would affect the quantity of money demanded. Does the change cause a movement along the money demand curve or a shift of the money demand curve (state the direction of the shift or movement)? a) Interest rates rises from 5% to 8%. b) The consumer price index (CPI) rises in the economy.When the money market is depicted in a diagram with the value of money on the vertical axis, which statement best describes the long-run effects of an increase in money supply? a)The price level decreases, but the quantity of money demanded increases b)The price level and the quantity of money demanded increases c)The price level and the quantity of money demanded decreases d)The price level increases, but the quantity of money demanded decreases
- Rate of interest (%) 16 14 12 10 00 6. 4 2 0 40 80 B 120 160 200 Quantity of investment 144 240 280Suppose 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) foxes 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. ? INTEREST RATE (Percent) 2 10 Money Supply Morey Demand 60 10 MONEY (Billions of dollars) 100 120 Money Demand The following graph plots the aggregate demand curve for this economy. BT Money Supply Following the price level increase, the quantity of money demanded at the initial interest rate of 6% will be supplied by the Fed at this interest rate. As a result, individuals will attempt to bonds and other interest-bearing assets, and bond issuers will realize that they is restored in the money market at an interest rate of [ than the quantity of money their money holdings. In order to…dy Tools Tips Tips The following diagram represents the money market in the United States, which is currently in equilibrium, as indicated by the grey star. INTEREST RATE (Percent no 2 5.0 45 30 H 08 Money Demand Money Supply 07 00 D 10 11 12 13 QUANTITY OF MONEY (Triations of dollars) 14 New Curve ++ New Equilibrium Suppose the Federal Reserve (the Fed) announces that it is raising its target interest rate by 25 basis points, or 0.25%. It would achieve this by Use the green line (triangle symbols) on the preceding graph to illustrate the effects of this policy. Place the black point (plus symbol) on the graph to indicate the new equilibrium interest rate and quantity of money, the The sequence of events that results in a new equilibrium interest rate, after the Fed makes the change you selected, may be described as follows: which means that bond issuers Because there is money in the financial system, the quantity of money demanded sell bonds. This process continues until the new…
- The following table shows the quantity of money supplied and the quantity of money demanded for various interest rates. Interest Rate (Percent) Demand for Money (Billions of dollars) Supply of Money (Billions of dollars) 11 50 250 9 150 250 7 250 250 5 350 250 3 450 250 The following graph depicts the money supply curve in orange. On the graph, use the blue points (circle symbol) to graph the money demand, and the black point (plus symbol) to signify the initial equilibrium point in the market. Next, shift the money supply curve to show the affects of a $200 billion increase in the money supply. Then, plot the point corresponding to the new equilibrium point using the purple point (diamond symbol). 13 MS 12 11 10 INTEREST RATE (Percent) + 5 M 9 3 2 MS Money Demand Equilibrium Equilibrium,b. Using appropriate diagram, explain how is money market equilibrium determined in the short run.Quantity of Money Demanded Which line in the above graph would best reflect the slope of the transactions demand for money curve? Line 2 Line 4 Line 3 Line 1 Rate of Interest 2.
- ? 2. Money supply, money demand, and adjustment to monetary equilibrium The following table shows a money demand schedule, which is the quantity of money demanded at various price levels (P). Fill in the Value of Money column in the following table. Price Level (P) Value of Money (1/P) 0.80 1.00 1.33 2.00 kkkk Quantity of Money Demanded (Billions of dollars) 2.0 2.5 4.0 Now consider the relationship between the price level and the quantity of money that people demand. The lower the price level, the money people will wish to hold in the form of currency or demand deposits. typical transaction requires, and the Assume that the Fed initially fixes the quantity of money supplied at $2.5 billion. money the Oct 9 11:59 SExplain in detail, with the aid of a graph, the two components of the demand for money. Identify the main determinant of each component. In your graph, illustrate each component as well as the total demand for money. (Hint: You do not have to draw separate graphs for each component. You can combine everythingon one set of axes).In the graph below (the market for money), the Rate of interest price of a dollar 12 10 8 4 2 50 ✔interest rate ✔price of borrowing or lending money O purchasing power S 100 250 Quantity of money demanded & supplied (billions of dollars) 150 is determined by the total demand for money intersecting with the total supply of money. 200 D