ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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According to John Maynard Keynes,
Answer
the demand for money in a country is determined entirely by that nation’s central bank.
the supply of money in a country is determined by the overall wealth of the citizens of that country.
the interest rate adjusts to balance the supply of, and demand for, money.
the interest rate adjusts to balance the supply of, and demand for, goods and services.
Question 34
While a television news reporter might state that “Today the Fed lowered the federal funds rate from 5.5 percent to 5.25 percent,” a more precise account of the Fed’s action would be as follows:
Answer
“Today the Fed told its bond traders to conduct open-market operations in such a way that the equilibrium federal funds rate would decrease to 5.25 percent.”
“Today the Fed lowered the discount rate by a quarter of a percentage point, and this action will force the federal funds rate to drop by the same amount.”
“Today the Fed took steps to decrease the money supply by an amount that is sufficient to decrease the federal funds rate to 5.25 percent.”
“Today the Fed took a step toward contracting aggregate demand, and this was done by lowering the federal funds rate to 5.25 percent.”
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- Suppose 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) fixes the quantity of money supplied. Suppose the price level decreases from 150 to 125. Shift the appropriate curve on the graph to show the impact of a decrease in the overall price level on the market for money. ? INTEREST RATE (Percent) 12 10 2 0 0 15 Money Supply Money Demand 30 45 60 MONEY (Billions of dollars) 75 90 Money Demand Money Supplyarrow_forwardSuppose that the central bank wants to stimulate the economy by increasing the money supply. The bankers estimate that the velocity of money is 2.8, and that the price level will increase from 130 to 150 due to the stimulus. Using the quantity equation of money, what will be the impact of an $800 billion dollar increase in the money supply on the quantity of goods(In billions) and services in the economy given an initial money supply of $4 trillion?(Please round your answer to include 2 decimal places.)arrow_forwardConsider the money market in the accompanying graph. Initially, the equilibrium interest rate and quantity are represented by the point, El. Suppose the central bank reduces the money supply. Adjust the graph of the money market to illustrate this change and label the new equilibrium by moving the point, E2. After this recent change in the money supply, what is true about the point E1? The quantity of money demanded is more than the quantity of money supplied. The quantity of money demanded is less than the quantity of money supplied. The quantity of money supplied is more than the quantity of money demanded. Those selling interest-bearing nonmonetary assets will face market pressure to lower their interest rates. Interest rate (%) Incorrect 10 9 8 7 6 5 4 3 2 1 0 0 1 2 E2 Money Market EI 3 4 5 6 Quantity of money 7 8 MS MD 9 10arrow_forward
- 6. Changes in the money supply The following graph represents the money market for some hypothetical economy. This economy is similar to the United States in the sense that it has a central bank called the Fed, but a major difference is that this economy is closed (and therefore does not have any interaction with other world economies). The money market is currently in equilibrium at an interest rate of 3.5% and a quantity of money equal to $0.4 trillion, designated on the graph by the grey star symbol. INTEREST RATE (Percent) 5.5 5.0 New MS Curve Money Demand 4.5 4.0 3.5 3.0 2.5 2.0 1.5 0 0.1 0.2 Money Supply 0.3 0.4 0.5 0.6 0.7 0.8 MONEY (Trillions of dollars) New Equilibrium (?) Suppose the Fed announces that it is raising its target interest rate by 50 basis points, or 0.5 percentage points. To do this, the Fed will use open- market operations to the money by the public. Use the green line (triangle symbol) on the previous graph to illustrate the effects of this policy by placing…arrow_forwardThe above figure has the demand for money curve. Suppose the Fed initially sets the quantity of money equal to $0.6 trillion. Draw the supply of money curve in the figure. What is the equilibrium interest rate? Now suppose the Fed increases the quantity of money to $0.9 trillion. Draw the new supply curve. What is the new equilibrium interest rate? If the Fed sells $100 million of U.S. government securities, what happens to the quantity of money?arrow_forwardWhich of the following statements is false A. Money is not a comsumption or a capital good B. An increase in the money supply does not confer a general benefit on society C. Economic theory cannot tell us generally which groups benefit and which groups are injured by inflation D. Economic theory cannot tell us the supply of money that is proper for an economy to havearrow_forward
- Homework (Ch 21) Consider a hypothetical economy in which households spend $0.50 of each additional dollar they earn and save the remaining $0.50. The following graph shows the economy's initial aggregate demand curve (AD₁). Suppose the government increases its purchases by $3 billion. Use the green line (triangle symbol) on the following graph to show the aggregate demand curve (AD2) after the multiplier effect takes place. Hint: Be sure the new aggregate demand curve (AD2) is parallel to AD₁. You can see the slope of AD₁ by selecting it on the following graph. PRICE LEVEL 116 114 112 110 108 106 104 102 100 100 AD1 102 112 104 106 108 110 OUTPUT (Billions of dollars) 114 116 AD₂ AD 3arrow_forwardMatch the correct policy with its description. Column A 1. 2. 3. 4. During a contraction or recession, the government can do two things: Decrease Taxes Or Increase Spending During a period of excessive inflation (during a period of expansion), the government can do two things: Increase Taxes Or Decrease Spending Increased lending by banks to customers (increased money supply) Lower Interest Rates on loans and bank accounts Increased borrowing from the Fed by banks Decreased lending by banks to customers (decreased money supply) Higher Interest Rates on loans and bank accounts Decreased borrowing from the Fed by banks % 5 M Column B a. Expansionary Fiscal Policy b. Contractionary Monetary Policy c. Contractionary Fiscal Policy d. Expansionary Monetary Policyarrow_forwardThe text notes that a 10% increase in the money supply may not increase the price level by 10% in the short run. Explain why.arrow_forward
- Show the impact of the increase in government purchases on the interest rate by shifting one or both of the curves on the following graph. INTEREST RATE 12 10 8 2 0 0 20 Money Supply known as the Money Demand 40 60 80 MONEY (Billions of dollars) 100 120 = Money Demand Money Supply ? Suppose that for every increase in the interest rate of one percentage point, the level of investment spending declines by $0.5 billion. Based on the changes made to the money market in the previous scenario, the new interest rate causes the level of investment spending to by Taking the multiplier effect into account, the change in investment spending will cause the quantity of output demanded to by at every price level. The impact of an increase in government purchases on the interest rate and the level of investment spending is effect. Use the purple line (diamond symbol) on the graph at the beginning of this problem to show the aggregate demand curve (AD3) after accounting for the impact of the increase…arrow_forwardMS, MS, MD М, м, QUANTITY OF MONEY The graph above shows a decrease in the money supply. Which of the following is consistent with this change? Contractionary Fiscal Policy is used to reduce income and increase Inflation Contractionary Monetary Policy is used to increase interest rates and decrease Inflation Expansionary Fiscal Policy is used to decrease income and decrease Inflation Expansionary Monetary Policy is used to lower interest rates and decrease Inflation NOMINAL * INTEREST RATEarrow_forwardThe graph shows the demand for money curve and the supply of money curve. The Fed decreases the quantity of real money supplied to $3.9 trillion. Draw a new MS curve that shows the effect of the Fed's action. Label it. Draw a point at the new equilibrium quantity of money and interest rate. Before the Fed decreases the quantity of money, the equilibrium interest rate is percent a year. After the Fed decreases the quantity of money, at an interest rate of 4 percent a year, people want to hold money than the quantity supplied, so they bonds. A. more; sell B. less; buy C. less; sell D. more; buy The price of a bond A. falls; falls O B. rises; falls and the interest rate 8- 7- 6- 5- 4- 3- 2- 1- Nominal interest rate (percent per year) 4 0+ 3.8 MS 4.0 MD 4.0 4.1 3.9 Quantity of money (trillions of 2009 dollars) >>> Draw only the objects specified in the questi 4.2arrow_forward
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