Assume the economy was in equilibrium and then the central bank injects money into the economy...
- Assume the economy was in equilibrium and then the central bank
injects money into the economy (increases money supply).
- Draw a graph showing how the market for money changes due to the monetary injection. (6 points). (Explain the changes in words)
b) Summarize how the value of money, price level, and quantity of money change. (4 points).
Homework Answers
a. As money is the injected into the economy, the money supply curve shifts to the right. The increase in money supply in the economy increases demand for bonds which in turn reduces the interest rate. The diagram showing these is below.
b. With the injection of money
into the economy, the quantity of money will clearly increase as
explained in previous part. The value of money will decrease since
money is now more easily available. This decrease in the value of
money will be reflected in increase in price as less can be now
purchased with the same amount of money.
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Assume the economy was in equilibrium and then the central bank
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