Discuss the short- and the long-term effects of a decrease in money supply on interest rates....
Discuss the short- and the long-term effects of a decrease in money supply on interest rates. Provide explanations for your arguments.
Homework Answers
Decrease in money supply reduces real money balances. Thus LM curve shifts to the left to LM'. In short run equilibrium is reached at e'where interest rate increases to i'.
Output also decreases leading to decrease in wages and prices. Lower prices results in higher real money balances which leads to rightward shift in LM' back to LM. Interest rate returns to its initial level i.
Thus decrease in money supply increases interest rate in short run but has no effect in long run.
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Discuss the short- and the long-term effects of a decrease in
money supply on interest rates....
Statements True False When the Fed increases the money supply, short-term interest rates tend to dedine....
Statements True False When the Fed increases the money supply, short-term interest rates tend to dedine. Actions that lower short-term interest rates will always lower long-term interest rates. Long-term interest rates are not as sensitive to booms and recessions as are short-term interest rates. The Federal Reserve Board has a significant influence over the level of economic activity, inflation, interest rates in the United States
18. Long-term interest rates are set by: (a) the supply and demand for money (b) the...
18. Long-term interest rates are set by: (a) the supply and demand for money (b) the supply and demand for bonds (c) the supply and demand for both bonds AND money (d) the coupon, or interest payment on a bond. 19. What is fixed and does not change on a bond is: (a) the price of the bond (b) the interest rate on the bond ! (c) the interest payment or coupon on a bond (d) all of the above
Suppose that the Fed decreases the growth rate of the money supply causing a decrease in...
Suppose that the Fed decreases the growth rate of the money supply causing a decrease in the long-run expected rate of inflation. In the context of the Friedman effect combined with the expectations theory of the term structure, A. both short-term and long-term interests rates should decrease roughly by equal amounts in the short-run. B. short-term rates should decrease more than long-term rates in the short-run C. both short-term and long-term interests rates should increase roughly by equal amounts in...
13. If the Fed conducts Open Market Purchase, then: a. price of bonds increase, interest rates decrease and money supply...
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7. According to the theory of liquidity preference, decreasing the money supply will nominal interest rates...
7. According to the theory of liquidity preference, decreasing the money supply will nominal interest rates in the short run, and, according to the Fisher effect, decreasing the money supply will nominal interest rates in the long run. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase 8. If neither investment nor consumption depends on the interest rate, then the IS curve is , and_ policy has no effect on output. A) vertical; monetary B) horizontal; monetary...
Central banks regularly use open market operations to influence short-term interest rates and market liquidity(money sup...
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Expansionary fiscal policy ________________ to fight______________. increase the money supply and cut interest rates, recession. decrease...
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Explain and demonstrate graphically, the short-run and long-run effects of an increase in the money supply...
Explain and demonstrate graphically, the short-run and long-run effects of an increase in the money supply using the AD-AS model.
Which of the statements is true about monetary policy? a) Decrease in the money supply lowers...
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A drop in interest rates: a. Affects the prices of short-term securities more than long-term securities...
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Statements True False When the Fed increases the money supply, short-term interest rates tend to dedine. Actions that lower short-term interest rates will always lower long-term interest rates. Long-term interest rates are not as sensitive to booms and recessions as are short-term interest rates. The Federal Reserve Board has a significant influence over the level of economic activity, inflation, interest rates in the United States
18. Long-term interest rates are set by: (a) the supply and demand for money (b) the supply and demand for bonds (c) the supply and demand for both bonds AND money (d) the coupon, or interest payment on a bond. 19. What is fixed and does not change on a bond is: (a) the price of the bond (b) the interest rate on the bond ! (c) the interest payment or coupon on a bond (d) all of the above
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