Question

Interest rate (percent per year) 7- The figure shows the demand for money curve in Epsilon. Draw the supply of money curve if the Fed wants the interest rate to be 6 percent a year. Label it. Draw a point at the equilibrium in the money market. 6- bonds. If the interest rate is 5 percent, people will Bond prices will 5- 4- O A. sell; rise OB. buy, fall O C. sell; fall OD. buy, rise MD The interest rate will 3+ 2.8 2.9 3.0 3.1 3.2 Real money (trillions of 2009 dollars) O A. remain unchanged O B. fall >>> Draw only the objects specified in the question.

Answer 1

Ans. If Fed wants to maintain an interest rate of 6%, then money supply must be $2.9 trillion and equilibrium point is represented by point A.

Interest rate (percent per year) MS 6- A 5- 4- MD 3+ 2.8 3.2 2.9 3.0 3.1 Real money (trillions of 2009 dollars)

a) Option c

At interest rate of 5%, the demand for money is more than supply, so, people will sell the bonds to fullfil their demand for money. This will decrease the demand for bonds which at given supply of bonds will decrease their price.

b) Interest rate will increase

Due to fall in price of bonds, their yield to maturity will rise. Thus, interest rate will increase.

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