Question

3. Assume that the money market is initially in equilibrium and that the money supply is then increased. Explain the adjustments toward a new equilibrium interest rate. Will bond prices be higher at the new equilibrium rate of interest? What effects would you expect that interest-rate change to have on the levels of output, employment, and prices? Answer the same questions for a decrease in the money supply 4. How is the chairperson of the Federal Reserve Board selected? Describe the relationship between the Board of Govermors of the Federal Reserve System and the 12 Federal Reserve Banks. What is the composition and purpose of the Federal Open Market Committoo (FOMC)? What is meant when economists say that the Federal Reserve Banks are central banks, 5. quasi-public banks, and bankers' banks? What are the seven basic functions of the Federal Reserve System?

Answer 1

I will answer the first question for others you have to ask separately, that is question 3,

In the IS-LM framework, the interaction of money market represented by LM and goods market represented by IS gives the equilibrium level of output and interest at a particular price level where IS is negatively sloped and LM is positively in the graph with Output on X and Interest rate on the Y-axis.

An increase in the money supply will shift the LM curve rightwards resulting in lowered equilibrium interest and expanded output at a particular price level.

Impact of Increase in money Supply Interest LM-0 LM-1 rate Output Y-O Y-1

Now see the graph, an increase in money supply will create an excess money supply that will lower the interest rate. A reduction in interest rate enhances investment that in turn will expand output level.

The bond prices are inversely related to the interest rate. Therefore, bond prices will be increased

An increase in the money supply will enlarge aggregate demand and this will increase both price level as well as output which was also established through IS-LM systems.

An increase in GDP resulted from form enlarged money supply will create labour demand. The resultant labour demand enhances wage rate and higher rate induces more people to supply their labour. Therefore, employment get bubbled

For a reduction in the money supply exactly opposite happens:

The interest rate increased, GDP decreased, Price level went down and employment squeezed.

Good luck!!

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