Question

The following graph shows the money market in a hypothetical economy. The central bank in this economy is called the Fed. ASsume that the Fed fixes the quantity of money supplied. 

Suppose the price level increases from 90 to 105.

 Shift the appropriate curve on the graph to show the impact of an increase in the overall price level on the market for money. 

 After the increase in the price level, the quantity of money demanded at the initial interest rate of 9% will be _______ than the quantity of money supplied by the Fed at this interest rate. People will try to _______ their money holdings. In order to do so, people will _______ bonds and other interest-bearing assets, and bond issuers will find that they _______ interest rates until the money market reaches its new equilibrium at an interest rate of _______ .

The following graph shows the economy's aggregate demand curve. 

Show the impact of the increase in the price level by moving the point along the curve or shifting the curve. 

The change in the interest rate that you found previously will cause residential and business investment spending to _______ , leading to _______ in the quantity of output demanded in the economy.

Suppose you've just inherited $10,000 from a relative. You're trying to decide whether to put the $10,000 in a non-interest-bearing account so that you can use it whenever you want (that is, hold it as money) or to use it to buy a U.S. Treasury bond.

The opportunity cost of holding the inheritance as money depends on the interest rate on the bond. 

For each of the interest rates in the following table, compute the opportunity cost of holding the $10,000 as money.

What does the previous analysis suggest about the market for money? 

• The supply of money is independent of the interest rate. 

• The quantity of money demanded increases as the interest rate falls. 

• The quantity of money demanded decreases as the interest rate falls.
  

Answer 1

a. As the price level increases, the demand for money would also increase and the demand curve would shift to the right. This is because more money is required at each price level to buy the same level of goods and services.

Interest MS rate 9% .MD2 MD1 Money 60

b. Greater.

c. Increase

d. Sell bonds. so as to get liquid money.

e. need to offer greater

f. 12%.

g.

Price 105 90 AD Output