Draw a graph of the money market to illustrate equilibrium in the short run. Show what...
Draw a graph of the money market to illustrate equilibrium in the short run. Show what happens if the Reserve Bank conducts an open market selling of securities.
Please can uh give me an elaborated answered. this question is for 4 marks.
Thanks
Homework Answers
An open market sale of securities will decrease the quantity of reserves in market, which will decrease money supply. Lower month supply will shift money supply curve leftward, increasing interest rate and decreasing quantity of money.
In following graph, MD0 and MS0 are initial money demand and money supply curves intersecting at point A with initial interest rate r0 and initial quantity of money M0. As money supply falls, MS0 shifts left to MS1, intersecting MD0 at point B with higher interest rate r1 and lower quantity of money M1.
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