Question

Modeling Money Graded Assignment | Due Sunday 06 30 19 at 1145 PM Attempts: Average: /8 6. The effect of Increased income in the liquidity-preference model of money A Aa 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 fxes the quantity of money supplied. Suppose the price level decreases from 90 to 60. Shift the appropriate curve on the graph to show the impact of a decrease in the overall price level. Tool tip: Cick and drag the appropriate curve. Curves will snap into position, so if you try to move to its original position, just try again and drag It a little farther. the curve and it snaps beck INTEREST RATE (Percent 184 Maney Supply 15+ 12 Money Demand 10 20 60 40 qUANTITY OF MONEY ns of delars After the decrease in the price level, the The lower price level shifts the money quantity of money demanded at the initial interest rate of 9% will be curve to the than the quantity of money supplied by the Fed. 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 reaches its new equilibrium at an interest rate of interest rates until the money market CoRNew Sve &Contioue

Answer 1

If the price level declines from 90 to 60, Quantity demand of money shifts to its left as people demand less of money because they need to pay lesser prices from the products. If Qd shifts to Qd1 and the money supply remains constant, interest rate would wall and the level of money in the economy would remain same.The lower price level shifts the quantity of money demand curve to left. After the decrease in price level, the quantity of money demanded at the interest rate of 9% will be lower than the quantity supplied be the Fed. People will try to shift their money holdings. In order to do so, people will sell bonds and other interest bearing assets and bond issuer will find that they raise interest rate until the money market reaches interest level of 9%.

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