Styles
4) Chs 11-12: The Federal Reserve and Money Growth & Inflation
Let us explore the consequences of a change in money demand (Md) in the economy. Draw a
diagram of the money market in its initial equilibrium (making sure to label all axes).
I
\begin{itemize}
\item If Md were to increase, what would happen to the federal funds rate (FFR) in the banking
system? Draw in this shock in your money market diagram (above).
\item In addition, following the increase in Md... if the Fed were to attempt to stabilize interest
rates within the banking system (i.e., return to the original FFR, prior to the increase in Md),
would the Fed expand or contract the money supply, or simply do nothing? If any action is
taken, draw in this shock in your money market diagram (above).
\item Separately, assume that the Fed expands the money supply by 60 percent per month for three
months.
\item Does this constitute inflation, deflation, or hyperinflation? (Explain)
\item Consequently, what happens to consumers' purchasing power (i.e., PP... ability to afford
goods and services)? In other words, does PP rise, fall, or stay the same?
\end{itemize}
