Explain the change in the nominal interest rate in the short run if a. Real GDP increases. b. Th

Explain the change in the nominal interest rate in the short...

Key Concepts

Nominal Interest Rate

The nominal interest rate is the percentage rate at which money borrowed is repaid without adjusting for inflation. It is the market-clearing rate in the money market determined by the interplay between money demand and money supply. In the short run, fluctuations in real GDP, the price level, or the money supply result in movements in this rate as the market seeks a new equilibrium.

Money Supply

Money supply denotes the total amount of money available within an economy, usually controlled by the central bank through monetary policy instruments. Changes in the money supply, like an increase created through policy measures, directly impact the liquidity in the economy. An increased money supply, all else equal, tends to reduce the nominal interest rate by shifting the equilibrium in the money market.

Money Market Equilibrium

This concept refers to the point where the quantity of money demanded equals the quantity of money supplied. In the short run, any shifts in factors affecting either demand or supply will force adjustments in the nominal interest rate until a new equilibrium is reached. It is fundamental in determining how changes in economic variables influence the cost of borrowing money.

Money Demand

Money demand is determined by the need for liquidity to carry out transactions, to safeguard against uncertainty, and to take advantage of future opportunities. It is influenced by variables such as real GDP, which affects transactional needs, and the price level, which alters the value and demand for money. An increase in real GDP or a rise in the price level typically raises the demand for money, which can lead to higher nominal interest rates if the money supply remains unchanged.

Transcript

00:02 Hello students, today we will discuss about nominal interest rate and how nominal interest rate in short run concept would be affecting the three situations that will be discussing further.

00:22 So let's understand what is nominal interest rate.

00:26 So it is a fundamental principle in economics as it is referred as the opportunity cost of something that increases and the consumers or the consumers.

00:38 The people in an economy tries to substitute for it.

00:42 But money has no exception.

00:44 That means money has no potential substitute.

00:48 Money is no exception, as money can also be substituted.

00:56 So the higher the opportunity of cost of holding money, so the other things would remaining are the same.

01:04 The smaller would be the quantity of real money demanded.

01:07 If the higher is the cost of opportunity, of holding money than it would remain the same.

01:24 Other things remaining the same.

01:26 So the smaller is the quantity of real money demanded.

01:29 The quantity of real money demanded would be less.

01:42 Now let's understand that what will be the impact of nominal interest rate in the short run if the real gdp increases.

02:08 If the real gdp increases, then the demand would also increase and in order to met the let's understand this with the help of a graph.

02:18 It would be easier.

02:20 So this is the money supply curve.

02:25 Money supply curve.

02:30 This is the nominal interest rate.

02:32 This is real money.

02:33 This is nominal interest rate.

02:38 So now let's say this was the point before any increase in the real gdp.

02:48 But now the gdp has increased.

02:53 So the shift in the money demand curve, this is the money demand curve.

03:01 There will be a right word shift in the money demand curve due to increase in the real gdp.

03:07 And this increase in the interest rate, this will be the increase in the interest rate.

03:13 Rate and this will be the shift in the interest rate with an increase in the real gdp.

03:25 So the demand for the money will increase automatically.

03:29 So in order to meet the higher expenditure, this forces the demand curve, money demand curve to shift right first.

03:36 And if the money supply curves remains unchanged, that means the nominal interest rate has to automatically increase...

Please give Ace some feedback