Question

od resource Search Exhibit 1 Value of Money MS2 MS1 11P1 MD1 MD2 Quantity of Money 6 Use Exhibit 1. Assume the money market is initially at 1/P, as the equilibrium value of money. Suppose a change in banking regulations has increased credit card availability. As a result, (x) money demand shifts left from MD1 to MD2 (y) the market will experience an excess demand for money if the Fed keeps the money supply at MS (z) the value of money. 1/P1 is more than its equilibrium level and the Fed must sell bonds, to shift the money supply to the left to MS to maintain an equilbrium at WP4 A. (X). Y and iz) B. (x) and (y) only c. (x) and (z) only D. (y) and (z) only E. (x) only linn whibit 1 Sunserhamne invernment regulations has caused the money demand to shift from

Answer 1

6) option C is correct. money demand will have to decrease because now there is an option of credit card which means people will demand less money. At the original value of money level there is an excess supply of money due to which the central bank will have to sell government securities in order to reduce the money supply and bring the equilibrium in the market

7) option A is correct. the demand has shifted to the left which means that the supply will have to be shifted to the left in order to maintain the value of money. If the supply is not shifted then the value of money will decrease to reach a new equilibrium.