Macroeconomics, Student Value Edition Plus MyLab Economics with Pearson eText -- Access Card Package (7th Edition)
7th Edition
ISBN: 9780134472669
Author: Blanchard
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Question
Chapter 4, Problem 2QAP
(a)
To determine
Individual’s money demand, when the interest rate increases by 5% and 10%.
(b)
To determine
Impact of interest rate on money demand.
(c)
To determine
Change in individual’s money demand at a 10% interest rate, when the yearly income is reduced by 50%.
(d)
To determine
Change in individual’s money demand at a 5% interest rate, when the yearly income is reduced by 50%.
(e)
To determine
Effect of income on money demand and dependence of this effect on interest rate in percentage terms.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Suppose that a person's yearly income is $60,000. Also suppose that this person's money demand function is given by
M = $Y(0.35 - )
Suppose that the interest rate is 15%.
The percentage change in this person's demand for money if her yearly income falls by 50% is
%.
Suppose that the interest rate is 10%.
The percentage change in this person's demand for money if her yearly income falls by 50% is
%.
Which of the following statements best describes the effect of income on money demand?
O A. any decrease (increase) in income leads to a proportional decrease (increase) in money demand regardless of the interest rate.
O B. Any decrease (increase) in income leads to a more than proportional increase (decrease) if money demand is low.
OC. Any decrease (increase) in income leads to a less than proportional increase (decrease) if money demand is high.
O D. Changes in income do not impact the demand for money.
At the current interest rate, suppose the supply of money is less than the demand for money. Given this information, we know that:
a) the price of bonds will tend increase.
b) the price of bonds will tend to fall.
c) production equals demand.
d) the goods market is in equilibrium.
In class we assumed that money demand
depends upon income, Md = L(Y, i). However,
if people hold money as a medium of
exchange it may be that money demand
really should depend upon consumption, Md
= L(C, i). In other words, if people consume
more, they will also want to hold more
money. Suppose that consumption, as usual,
depends upon disposable income, C = C(Y –
T). Money demand will then also, indirectly,
depend upon disposable income, Md = L[C(y
- T), i]. True or False: In this case, a tax cut will
always increase in the short run
Chapter 4 Solutions
Macroeconomics, Student Value Edition Plus MyLab Economics with Pearson eText -- Access Card Package (7th Edition)
Knowledge Booster
Similar questions
- Suppose you receive Tk. 10,000 from your grandmother and deposits the money in a saving account. your grandmother gave you the money by writing a check on her saving account. Would the maximum increase in the money supply still be what you found it to be in part a) where you received the money from the sky? Why or why not? can anyone explain please why it will changearrow_forwardSuppose 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 90 to 75. Shift the appropriate curve on the graph to show the impact of a decrease in the overall price level on the market for money. Following the price level decrease, the quantity of money demanded at the initial interest rate of 6% will be (greater/less) than the quantity of money supplied by the Fed at this interest rate. As a result, individuals will attempt to (increase/decrease) their money holdings. In order to do so, they will (buy/sell) bonds and other interest-bearing assets, and bond issuers will realize that they (have to offer higher/can offer lower) interest rates until equilibrium is restored in the money market at an interest rate of________% The following graph plots the…arrow_forwardSuppose 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 increases from 90 to 105. Shift the appropriate curve on the graph to show the impact of an increase in the overall price level on the market for money. Following the price level increase, the quantity of money demanded at the initial interest rate of 6% will be (greater/less)than the quantity of money supplied by the Fed at this interest rate. As a result, individuals will attempt to (increase/decrease) their money holdings. In order to do so, they will (buy/sell) bonds and other interest-bearing assets, and bond issuers will realize that they (have to offer higher/can offer lower) interest rates until equilibrium is restored in the money market at an interest rate of ______%. The following graph plots the…arrow_forward
- Suppose that money demand is given by the function MD=55+P, and the Bank of Canada maintains the supply of money at MS=$58b. If the Bank of Canada suddenly increases the money supply to MS'-$60b, what has happened to equilibrium value of money? a)It has decreased from 5 to 2 b)MD will shift, and the value of money will remain unchanged c)It has increased from 3 to 5 d) It has decreased from 1/3 to 1/5arrow_forwardSuppose the Federal Reserve (the Fed) announces that it is lowering its target interest rate by 75 basis points, or 0.75%. It would achieve this by ______the ________. Use the green line (triangle symbols) on the preceding graph to illustrate the effects of this policy. Place the black point (plus symbol) on the graph to indicate the new equilibrium interest rate and quantity of money. The sequence of events that results in a new equilibrium interest rate, after the Fed makes the change you selected, may be described as follows: Because there is__________money in the financial system, there is an excess _________ money at the initial equilibrium interest rate. Individuals and businesses adjust their asset portfolios by _______bonds. As a result, the price of bonds_________ , and the interest rate______ . This process continues until the new equilibrium interest rate is achieved.arrow_forward2. Money supply, money demand, and adjustment to monetary equilibrium The following table gives the quantity of money demanded at various price levels (P), the money demand schedule. In the following table, fill in the column labeled Value of Money. Quantity of Money Demanded Price Level (P) Value of Money (1/P) (Billions of dollars) 1.00 1.00 1.33 0.75 2.00 0.50 4.00 0.25 1.5 2.0 3.5 7.0 Now consider the relationship between the quantity of money that people demand and the price level. The lower the price level, the less required to complete transactions, and the less money people will want to hold in the form of currency or demand deposits. Assume that the Federal Reserve initially fixes the quantity of money supplied at $3.5 billion. Use the orange line (square symbol) to plot the initial money supply (MS₁) set by the Fed. Then, referring to the previous table, use the blue connected points (circle symbol) to graph the money demand curve. moneyarrow_forward
- You are given the following information: Money demand for transaction (Mdt) = 0.2Y Money demand for speculation (Mds/P) = 500 – 5,000r Money supply (Ms) = 2,500 Price level (P) = 2 Income level (Y) = 10,000 where r represents the rate of interest. Based on the above information, calculate the equilibrium levels of interest rate and quantity of money. . If the interest rate is fixed at 0.1, what is the quantity of money demanded and supplied. Demonstrate your answers to parts (d)(i) and (d)(ii) in an appropriate diagram.arrow_forwardRefer to Figure 11.2. Suppose that the Quantity of money demanded is currently at Point B. A movement to Point D could be caused byA) an increase in income, ceteris paribusB) a decrease in the interest rate, ceteris paribusC) a decrease in the price level, ceteris paribusD) an increase in the price level, ceteris paribusarrow_forwardJosh is playing blackjack for real money. He has reference-dependent preferences over money: if his earnings are m and his reference point is r, then his utility is v(m – r), where the value function v satisfies v(x) = In(x + 1) for x ≥ 0, and v(x) = −2 In(-x + 1) for x ≤ 0. assume that Josh's reference point is 0 Euro (that is, no wins or losses) and for the given situation, answer the following questions: (i) What is the g for which Josh would be indifferent between taking a fifty- fifty win g Euro or lose 5 Euro gamble?arrow_forward
- The following table gives the quantity of money demanded at various price levels (P), the money demand schedule. In the following table, fill in the column labeled Value of Money. Quantity of Money Demanded (Billions of dollars) Price Level (P) Value of Money (1/P) 0.80 1.25 1.00 1.00 1.33 0.75 2.00 0.50 2.0 2.5 4.0 8.0 Now consider the relationship between the quantity of money that people demand and the price level. The lower the price level, the less money required to complete transactions, and the less money people will want to hold in the form of currency or demand deposits. Assume that the Federal Reserve initially fixes the quantity of money supplied at $4 billion. Use the orange line (square symbol) to plot the initial money supply (MS₁) set by the Fed. Then, referring to the previous table, use the blue connected points (circle symbol) to graph the money demand curve. 2.00 1.75 1.50 0.75 0.50 0.25 ཱ་ཎྜ་ཉ་མ་༅་གླུ་སྒྲ་སྐྱ VALUE OF MONEY 1.25 Money Demand ° 1 2 3 4 5 B 7 QUANTITY…arrow_forwardAccording to your graph, the equilibrium value of money is , therefore the equilibrium price level is Now, suppose that the Fed reduces the money supply from the initial level of $3.5 billion to $2 billion. In order to reduce the money supply, the Fed can use open market operations to the public. Use the purple line (diamond symbol) to plot the new money supply (MS2 ). Immediately after the Fed changes the money supply from its initial equilibrium level, the quantity of money supplied is than the quantity of money demanded at the initial equilibrium. This contraction in the money supply will people's demand for goods and services. In the long run, since the economy's ability to produce goods and services has not changed, the prices of goods and services will and the value of money willarrow_forwardThe following diagram shows the Money Market for a hypothetical economy. Suppose that the economy begins with a Money Supply (Ms) of $300 million, and an equilibrium interest rate of 5.0%. Finally suppose that the required reserve ratio (rr) is 15%. Use the scenario to answer Questions 10 to 13. Interest rates (i) 5.5% 5% 4.5% Ms O increase the money supply $10 million O increase the money supply $100 million O decrease the money supply $300 million O decrease the money supply $200 million O decrease the money supply $100 million $200 $300 $350 Mp Quantity of Money (millions) Suppose that the Central Bank wished to raise the equilibrium interest rate up to 5.5%. In order to achieve this, it would need I toarrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Economics (MindTap Course List)EconomicsISBN:9781337617383Author:Roger A. ArnoldPublisher:Cengage Learning
Economics (MindTap Course List)
Economics
ISBN:9781337617383
Author:Roger A. Arnold
Publisher:Cengage Learning