Question

QUESTION 1 0.5 points Save Answer Suppose banks respond to the warry among depositors that with home prices declining bank might become troubled and fail by increasing their reserve holdings, In this case, OMd/P shifts left O Md/P shifts right O Ms/P shifts left OMs/P shifts right QUESTION 2 0.5 points Save Answer Consider an economy at equilibrium according to the IS-LM model with Y-Y1 and r=r1. Suppose consumers become more optimistic so that, according to the the goods market, Y should increase to Y2. Once the money market is taken into account, output will settle at Y2 will settle at Y3 where Y3>Y2 will settle at Y3 where Y1 Y3<Y2 will settle at Y3 where Y3-Y1 is indeterminate as the answer depends on what happens to the LM curve

Answer 1

Question 1.

Ans: Ms / P shifts left.

Reason: Increasing reserve holdings means fall in loanable funds and hence, less money supply.

Question 2.

Ans: will settle at Y3 where Y1 < Y3 < Y2.

Reason: According to goods market, output should end up at Y2 but crowding out happens due to presence of money market. With rise in output to Y2, money demand rises which leads to rise in interest rate. Rise in interest rate causes fall in investment and hence, output. So, it settles down between Y1 and Y2.

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