Question

Draw a diagram that illustrates equilibrium in the money market. Now suppose the Bank of canada increase the money supply. Illustrates graphically and explain verbally how the money market moves to a new equilibrium

Answer 1

Page No. Date : librium in the money market is given by the Intersection of them supply Curve. Monen demand Curve and money by the on the Central Central Bank tined and decided Bank supply is of the Country, where as money demand is a inverse fonction of Interent rate. oney supply Curve is a vertical line and money demand Canue is a negatively Sloped Cunne. cot Ms. This , - money demand o Mi Mi Md, MS Initially the money market Equilibrium is at point (&), where (it) is the equilibrium interest rake and (m) is the equilibrium Ouantity of money. Now, there is a increase in money supply which will shift the money supply Cunue to right waard , the new cunue is shown by (ms. Due to this, there will be fall in the Equilibrium interest rake and rise in the Quantity of Equilibrium money. The new Equilibrium is at point (F).