Nominal interest rate MS2 MS1 MD Quantity of money
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There are two vertical lines, MS1 and MS2, representing two different levels of money supply, with MS1 to the right of MS2, indicating a higher quantity of money in MS1. The Money Demand (MD) curve is downward sloping, indicating that as the interest rate Show more…
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3. Answer the following questions assuming the economy is in a recession and the FED decides to buy bonds from the public: a. What is the impact of the FED’s action on bank reserves? (1/2 Point) Increases OR Decreases b. What is the impact of the change in bank reserves on the money supply? (1/2 Point) Increases OR Decreases c. As the money supply changes, which direction does the money supply line move? (1/2 Point) Left OR Right d. The shift in the money supply line results in a new equilibrium with a: (1/2 Point) Higher interest rate OR Lower interest rate e. Draw the money supply and demand curves, properly labeling the x-axis and y-axis, to show the change in the money supply and the resulting impact on interest rates. (5 Points) f. As a result of the change in interest rates, investments: (1/2 Point) Increase OR Decrease g. The change in investments results in: (1/2 Point) o A decrease in output and a decrease in employment o A decrease in output and an increase in employment o An increase in output and a decrease in employment o An increase in output and an increase in employment h. As a result of the change in employment, income: (1/2 Point) Increases OR Decreases i. The change in income causes consumption to: (1/2 Point) Increase OR Decrease j. As consumption changes, which direction does the demand curve for goods and services move? (1/2 Point) Left OR Right k. The shift in the demand curve for goods and services results in a new equilibrium with: (1/2 Point) Lower prices OR Higher prices l. Draw the supply and demand curve for goods and services, properly labeling the x-axis and y-axis, to show the change in equilibrium. (5 Points)
Andrew D.
The following diagram represents the money market in the United States, which is currently in equilibrium, as indicated by the grey star. Suppose the Federal Reserve (the Fed) announces that it is raising its target interest rate by 50 basis points, or 0.50%. It would achieve this by increasing the money supply. 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 less money in the financial system, there is an excess demand for 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.
Akash M.
Because of the economic slowdown associated with the $2007-2009$ recession, the Federal Open Market Committee of the Federal Reserve, between September $18,2007,$ and December $16,2008,$ lowered the federal funds rate in a series of steps from a high of $5.25 \%$ to a rate between zero and $0.25 \%$. The idea was to provide a boost to the economy by increasing aggregate demand. a. Use the liquidity preference model to explain how the Federal Open Market Committee lowers the interest rate in the short run. Draw a typical graph that illustrates the mechanism. Label the vertical axis "Interest rate" and the horizontal axis "Quantity of money." Your graph should show two interest rates, $r_{1}$ and $r_{2}$ b. Explain why the reduction in the interest rate causes aggregate demand to increase in the short run. c. Suppose that in 2015 the economy is at potential output but that this is somehow overlooked by the Fed, which continues its monetary expansion. Demonstrate the effect of the policy measure on the $A D$ curve. Use the $L R A S$ curve to show that the effect of this policy measure on the $A D$ curve, other things equal, causes the aggregate price level to rise in the long run. Label the vertical axis "Aggregate price level" and the horizontal axis "Real GDP."
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