1. For each of the following questions, draw the Money Demand curve (MD) and Money Supply curve ( MS) and label the equilibrium interest rate as i*. Also show how the MS - MD graph changes due to the given events and as a result how the equilibrium interest rate changes. (In your answer you should clearly state and show what happens to the MS and MD curves and also what happens to the interest rate)c) The price level increases and at the same time there is an open market purchase. d) Taxes increase and there is a decrease in the RRR

1. For each of the following questions, draw the Money Demand curve (MD) and Money Supply curve ( MS) and label the equilibrium interest rate as i*. Also show how the MS - MD graph changes due to the given events and as a result how the equilibrium interest rate changes. (In your answer you should clearly state and show what happens to the MS and MD curves and also what happens to the interest rate)c) The price level increases and at the same time there is an open market purchase. d) Taxes increase and there is a decrease in the RRR

Principles of Economics (MindTap Course List)

8th Edition

ISBN:9781305585126

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter34: The Influence Of Monetary And Fiscal Policy On Aggregate Demand

Section: Chapter Questions

Problem 6PA

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1. Suppose that the economy has the following money supply and demand equations: Money Supply: M = 8000Money Demand: M= 10,000 – 40,000rwhere money is in billions of dollars and interest rates, r , is written as a decimal(e.g., an interest rate of 10% would be written as .1 in the equation).A. Determine the equilibrium interest rate and quantity of money.B. What will happen in the money market if the interest rate is currently 10%?What is the amount of excess supply of or excess demand for money?C. Show in graph that at this interest rate (10%) there is disequilibrium in themoney market.
8. Using an appropriate diagram, explain how the equilibrium interest rate is determined in the economy. If the central bank wants to reduce the equilibrium interest rate, what should they do? Illustrate this in the same diagram you have drawn earlier.
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Figure 21. The graph on the left shows a money market with the interest rate on the vertical axis and the quantity of money on the horizontal axis. The graph on the right is related to the money market graph and shows an aggregate demand (AD) with the price level on the vertical axis and quantity of output on the horizontal axis "2 "1 MS MD2 MD₁ 1 P₂ P₁ AD 1₂ ₁ Refer to Figure 21. The changes on the two graphs are related. Which of the following is a correct explanation of the movement of the economy from point Y1 to point Y2. The Federal Reserve's expansionary monetary policy shifts the demand for money from MD1 to MD2. The resulting increase in the interest rate causes Y to decrease from Y1 to Y2. The rise of the price level from P1 to P2 leads to an increase in the demand for money represented by the rightward shift of the money demand curve from MD1 to MD2. The resulting rise of the interest rate causes Y to decrease from Y1 to Y2. A fall in the price level from P2 to P1 causes an…
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2. Suppose that money demand is given by M' =$Y(0.25 – i), where SY is 100. Also, suppose that the supply of money is $20. The equilibrium interest rate is _ If the central bank wants to increase i by 10 percentage points (e.g. from 2% to 12%, the actual interest rate depends on result you calculate), it should set the supply of money at