Chapter 28, Problem 1FRQ

a.

To determine

To draw: A labeled graph of the money market illustrating the impact of the increase in the aggregate price level.

Explanation of Solution

Calculation:

  

Graph 1

In this graph, demand for money increases if the aggregate price level is increased. This is because more money will be required to spend as the price level is increased. For instance, if the price of a product is increased by 20%, then the demand for money will also increase by 20%. Therefore, the demand curve will shift towards the right.

Economics Concept Introduction

Money Market: The money market is the place where the trading of short-term financial instruments takes place. The short-term financial instrument includes commercial papers, T-bills, interbank loans, mutual funds, etc.

b.

To determine

To draw: A labeled graph of the money market illustrating the impact of the decrease in real GDP.

Explanation of Solution

Graph showing the effect if there is a decrease in real GDP which is as follows:

  

Graph 2

Therefore, if real GDP is decreased the demand for money will increase and the demand curve will shift towards the right. This is because more money will be demanded in the form of short-term loans.

Economics Concept Introduction

Money Market: The money market is the place where the trading of short-term financial instruments takes place. The short-term financial instrument includes commercial papers, T-bills, interbank loans, mutual funds, etc.

c.

To determine

To draw: A labeled graph of the money market illustrating the impact of the increase in online banking.

Explanation of Solution

Graph showing the effect if there is an increase in online banking which is as follows:

  

Graph 3

Therefore, if online banking is increased then the demand for money will decrease and the demand curve will shift toward the left.

Economics Concept Introduction

Money Market: The money market is the place where the trading of short-term financial instruments takes place. The short-term financial instrument includes commercial papers, T-bills, interbank loans, mutual funds, etc.