Question

It would be greatly appreciated if you can help to do the followings. Thanks!

1.

Suppose that the liquidity effect is immediate and smaller than the other effects, and our expectations of inflation adjust quickly. Referring to the graphs on the right, choose the time path of interest rates from an increase in the growth rate of the money supply that occurs at time T." O A. GraphB O B. Graph A Interest Rate When the Fed wants to raise the expected inflation, it should the growth rate of the money supply If the Fed is only concerned about the short-run economym the liquidity effect is smaller than the other effects and expected inflation adjusts slowly, then to lower the short-run interest rates, the Fed should always money supply. the growth rates of the Time a) b) Interest Rate Click to select your answer

2.

3.

4.

5.

Answer 1

From Section One

1. Graph A

Graph A shows the correct time path of interest rates from an increase in the growth rate of money supply that occurs at time T.

Because of increase in money supply, total reserves in the banking system rises. All else being equal, banks have more money to lend. This increases the available supply of loanable funds. Since we assume demand for loanable funds is unchanged, and since interest rates are the equilibrating force in this market, we should see that interest rates drop (because the supply curve shifts right/up)

2. Increase

When Fed wants to raise inflation, it should increase the growth rate of money supply because more money being available, the prices rise causing inflation to rise.

3

To lower interest rates the money supply needs to be increased.

When supply is increased , people have enough cash to spend, banks lend out more money at lower interests.

From Section Two

1. Graph B

Because of decrease in growth rate of money supply, the interest rates would fall. Since the liquidity effect is more, they would continue falling more steeply as time passes.

2. C

Since growth rate of money supply rises and liquidity effect is high, the interest rates would rise gradually but continously until it reaches long run level.

From Section 3

1. Answer is 7%.

The answer is calculated as (100*63)/937

From Section 4

1. B

If demand for bonds shift to the left, the demand is decreasing, so prices would fall, but interest rates would rise.

2. Decreases, Increases.

If supply of bonds shift to the right, the supply is increasing, so prices would have to be decreased, but interest rates would rise.