Macroeconomics, Student Value Edition Plus MyLab Economics with Pearson eText -- Access Card Package (7th Edition)
7th Edition
ISBN: 9780134472669
Author: Blanchard
Publisher: PEARSON
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Question
Chapter 4, Problem 4QAP
(a)
To determine
Equilibrium interest rate.
(b)
To determine
Level of supply of money that should be set, when the central bank increases equilibrium interest rate increases by 10 percentage points.
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Students have asked these similar questions
The demand for money is given by Md = $Y (0.3-i), where $Y =
120 and the supply of money is $30.
What is the equilibrium interest rate?
If the central bank wants to decrease i by 2%, at what level
should it set the supply of money?
Problem 2.
Suppose that money demand is given by
Md = $Y(0.45 – 0.4i)
where $Y is $90.
Answer the Following Questions:
a) What is the demand for money when interest rates are zero?
b) What is the smallest value of the money supply at which the interest rate is zero?
c) Once the interest rate is zero, can the central bank continue to increase the money supply?
According to your graph, the equilibrium value of money is (0.25, 0.50, 0.75, 1.00) therefore the equilibrium price level is (1.00, 1.33, 2.00, 4.00).
Now, suppose that the Fed reduces the money supply from the initial level of $4 billion to $2.5 billion.
In order to reduce the money supply, the Fed can use open market operations to (sell bonds to – buy bonds from) 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 (greater – less) than the quantity of money demanded at the initial equilibrium. This contraction in the money supply will (increase – reduce) 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 (rise – fall) and value of money will (rise – fall)
Chapter 4 Solutions
Macroeconomics, Student Value Edition Plus MyLab Economics with Pearson eText -- Access Card Package (7th Edition)
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- 2. 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_forwardThe 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% and a quantity of money equal to $0.4 trillion, designated on the graph by the grey star symbol. INTEREST RATE (Percent) 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0 Money Demand 0.1 0.2 0.3 0.4 Money Supply 0.5 0.6 0.7 0.8 New MS Curve New Equilibrium ?arrow_forwardIn a stationary monetary equilibrium, what is true about the rate of return to holding money if population is constant, but the stock of money can change over time? 1 plus r subscript m equals M subscript t over M subscript t plus 1 end subscript 1 plus r subscript m equals 0 1 plus r subscript m equals M subscript t plus 1 end subscript over M subscript t 1 plus r subscript m equals 1 In a stationary monetary equilibrium, what is true about the rate of return to holding money if population is constant, but the stock of money can change over time? 1+rm Mi+1 ) 1+rm=0 Mi+1 1+rm- O1+rm=1arrow_forward
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