Interest rate (percent) 8 6 4 2. 0 MS1 MS2 200 400 600 800 Quantity of money (billions of dollars) MO Starting from an equilibrium at E, in Exhibit 16-2, a rightward shift of the money supply curve from MS, to MS₂ would c excess:
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- c) The demand for money is given by: Md 0.5Y - 2000r i. If the income level is Y = 1000, and the interest rate is r= 10%, what is the demand for money? ii. What is the equilibrium level of interest rates when the supply of money is equal to 200? iii. What happens to the equilibrium rate of interest when increase in the money supply to 400?QUESTION 4Consider the model of money demand we saw in class. Let the elasticity of money demand with respect to real income be 0.8 and the elasticity of money demand with respect to the interest rate on non-monetary assets be -0.2. Imagine that real income goes up by 3%, the interest rate on non-monetary assets goes up by 1%, and the price level does not change. Then the nominal demand for money changes by________percent.Note: Type in your answer rounded to two decimal places, i.e., your answer must be of the form "999.99". I will not be able to fix correct answers that were entered incorrectly, such as "999.999" or "999,99" or "999". In case the last digit in the correct answer is zero, e.g., "999.90" or "999.00", Blackboard may automatically delete it and you should not do anything about it. In case of percentages, do not type in the percentage symbol "6". fyour answer is a negative number, type a dash in front of your answer, i.e, "-999.99.Figure 31-3 On the following graph, MS represents the money supply and MD represents money demand. VALUE OF MONEY 0.6 0.45 5000 MS. MS. 9000 QUANTITY OF MONEY MO Refer to Figure 31-3. At the end of the first year, the relevant money-supply curve was the one labeled MS]. At the end of the second year, the relevant money-supply curve was the one labeled MS2. Assuming the economy is always in equilibrium, what was the economy's approximate inflation rate for the second year? 8.3 percent -33 percent 33 percent -25 percent
- a. C. Figure 30-2. On the graph, MS represents the money supply and MD represents money demand. The usual quantities are measured along the axes. d. 1.125 0.875 it 0.75 0.625 05. 0.375 + 0.25 + 0.125 + d 84. Refer to Figure 30-2. At the end of 2009 the relevant money-demand curve was the one labeled MD2. At the end of 2010 the relevant money-demand curve was the one labeled MD₁. Assuming the economy is always in equilibrium, what was the economy's approximate inflation rate for 2010? -43 percent b. -57 percent MS 57 percent 75 percent 5,000 MD₂ MD₁Refer to the figure that shows the money demand and supply and investment demand curves. Mp Mso Ms1 Eo M, Mo Quantity of Money (i) Money demand and supply Investment Expenditure (ii) Investment demand Part (i) of the figure shows the money market and the effect of an increase in the supply of money. The corresponding sequence of events in of money at i , leads firms and households to the bond market is as follows: The bonds, which leads to a(n) il the price of bonds and a decrease in the interest rate. O A. excess demand; sell; increase O B. excess demand; sell; decrease O C. excess supply; buy; decrease O D. excess supply; buy; increase Refer to the money demand curve. Given the money demand curve, Mp, an increase in the quantity of money demanded from M, to M, can be caused by O A. an increase in the price level. O B. an increase in the rate of interest. C. a decrease in the price level. O D. a decrease in the rate of interest. 1 * Mp Mo M, Quantity of Money Interest Rate Interest…J-3 The Dornbusch model has far reaching applications. Explain with examples what will happen in the Dornbusch overshooting model if there is both an increase and a decrease in the domestic money supply.
- Money demand curve is downward sloping because as interest rate rises, businesses find it less attractive to borrow for the sake of investment. as interest rate rises, liquidity provided by holding money looses itsattractiveness for households, compared to other financial instruments as means of saving. as interest rate rises, it becomes less attractive for households to hold other financial instruments as means of saving as interest rate rises, households will need less money for their daily transactions.Consider the model of money demand we saw in class. Let the elasticity of money demand with respect to real income be 0.8 and the elasticity of money demand with respect to the interest rate on non-monetary assets be -0.2. Imagine that real income increased by 2.75% and nominal interest rate on non-monetary assets increased by 0.2%. If the central bank wants inflation to be at exactly 2%, it should increase money supply by _____ percent. what goes in blank?6. Assume the demand for real money balances is given by Ma/P = Y/6-150i. price level =100 a) Find the equilibrium interest rate if the money supply is $1,700 and output equals 129. b) Find the new equilibrium interest rate if the money supply is $1,700 and output increases to 138. c) Plot both interest rates and demand curves on the same graph.
- The Fed buys bonds from Cheryl. She takes the money, goes to the Burning Man festival in Southern California and burns its. Her actions create: O hot money O a change in the simple deposit multiplier O a cash leakage O a cash deficitHow will each of the following scenarios impact the market for money The central bank increases the discount rate at the same time there is a discovery of gold that fuels inflation Using (equilibrium quantity of money unchanged, equilibrium interest rate unchanged, shift outwards/to the right, shift inwards/to the left, movement along the curve, decrease equilibrium quantity of money, increase equilibrium quantity of money, increase equilibrium interest rate, decrease equilibrium interest rate). Impact on supply of money _______ Impact on equilibrium interest rate _______ Impact on quantity of money ________ Impact on deamnd for money ________1- Assume that the demand for money is given by Md $Y (0.8-4i). Initially, the base is $100 billion, and nominal income is $5 trillion. Also suppose that the public holds monetary no currency and the ratio of reserves to deposits is 0.1. What is the demand for central bank money? a. b. Find the equilibrium interest rate by setting the demand for central bank money equal to the supply of central bank money. c. What is the overall supply of money? Is it equal to the overall demand for money at the interest rate you found in part (b)? d. What is the impact on the interest rate if central bank money is increased to $300 billion? e. What is the impact if the central bank decided to increase required reserve ratio to 0.2? (Ctrl)- DFocus EGO