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- ASAPWhat quantity is measured along the horizontal axis? the price level O the quantity of money O the real interest rate On the graph, MS represents the money supply and MD represents money demand. The usual quantities are measured along the axes. O the value of money 1.125- 1 0.875 0.75 0.625 + 05 0375 + 025 0.125- MS 5,000 MD₂ MD₁The speculative demand for money is... A. positively related to interest rates. B. inversely related to interest rates. C. directly related to income. D. an active balance (earns interest).
- This question is about the money market and the workings of central bank. a. How a central bank uses the open market operations (OMO) to increase or decrease money supply? b. What kind of relationship exist between an asset’s price and rate of return? Explain why. c. Please write a “real money demand function” and show and explain what are the main determinants of money demand with the signs (- or +) of each factor. d. Is the money demand function that you wrote in part (c) same with “the Cambridge money demand function”? Explain if there is a difference between the two. e. What the quantity theory of money (QTM) says about the relationship between money supply and the price level? Explaina Imagine an economy has the following situation: Velocity of money (V) is constant, Nominal Money Supply (M) growth is 8%, Output (Y) growth is 4% and real interest rate (r) is 4%. Calculate the following: i. Nominal interest rate (i) ii. If State Bank of Pakistan (SBP) increases the money growth rate by 2 percent point per year, find Δi? iii. If the growth rate of Y decreases to 2% per annum, what will happen to the inflation rate (π)?. Let real GDP growth-2.4% per year, money growth-5% per year, nominal interest rate 4.8% and velocity of money-constant. (a) Find the inflation rate, the real interest rate, and the cost of holding money.
- 4. Suppose demand for real money balance is 500 + 0.2Y –1000i. P If P = 10, Y= 1000, and I= 0.10, and the money market is in equilibrium, What is the equilibrium stock of nominal money? b. What is the velocity of money? Suppose there is an autonomous increase in money demand by 100, with a constant nominal money supply, P = 10, and Y= 1000, what is the equilibrium i? d. If the central bank wishes to maintain i = 0.10, what must the nominal money supply be? Draw and label completely a money market equilibrium diagram. Label equilibrium M/P and i with their actual values. Draw and carefully label the changes that result from (c) and (d) above. а. c. е.Interest Rate 2 MⓇ Mi Mº Quantity of Money, M 25) In the figure above, one factor NOT responsible for the decline in the demand for money is A) a decline in income. B) a decline the price level. C) an increase in income. D) a decline in the expected inflation rate.