Question

7. Suppose that the demand and supply of money in the U.S. can be depicted by each of the graphs below. For each situation, assume that the overall price level in the economy cannot change (i.e. it is a "short-run" analysis). (30 total points) a) Show how the money market would be affected in the graph if the Federal Reserve Board in the U.S. decides to sell bonds to the private bond market. . Describe what would happen (if anything) to the money supply, (3 points) demand for money, (3 points) interest rates, (3 points) borrowing for homes and new capital equipment. (3 points) Correct depiction of graph (3 points) . . Interest rate M$/P N Demand for money = L(i, Y) Quantity of Money

Answer 1

Answer

A,

●Money supply:- If fed sell the bonds in private market then the money supply in the economy will decrease and the money supply curve shift to left.

● Demand for money:- when supply of money decreases it leads to increasing rate of interest so the demand for money decreases due to increase in this rate of interest.

●Interest rate:- due to decrease in money supply the interest rate will increase from r to r1.

● borrowings for home and New Capital equipment will decrease. Now the interest rate increase so it is abundant to borrow at this time so people decrease the borrowing.

B,

Money supply will not shift to either left or right

Demand for money decrease because consumption decreases so the demand for money also decrease

Interest rate decreases because demand for money decreases so r to r1

Borrowings for home and new capital it's can be done because the rate of interest fall.
a mi/p n/p interest vate --- 8 e Mo. Quantity of money

b /W interest rate gi Mo MD' Quantity of money