1. Suppose that the money market can be depicted in the graph below Interest rate (M/P)2 (M/P)⁰ (M³/P)¹ B C L3 L1 12 Quantity of Money LI is the original demand for money by the public and (M/P) is the real money supply. Assume that the price level does not change. The original equilibrium is at point O. Suppose that the Federal Reserve board lowered the reserve requirement for commercial banks. Briefly describe how you reached that conclusion. Identify the new equilibrium point and explain what happens to interest rates.

1. Suppose that the money market can be depicted in the graph below Interest rate (M/P)2 (M/P)⁰ (M³/P)¹ B C L3 L1 12 Quantity of Money LI is the original demand for money by the public and (M/P) is the real money supply. Assume that the price level does not change. The original equilibrium is at point O. Suppose that the Federal Reserve board lowered the reserve requirement for commercial banks. Briefly describe how you reached that conclusion. Identify the new equilibrium point and explain what happens to interest rates.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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