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- The money market in the United States and the investment demand curve are as shown in the graphs below. Currently, the Federal Reserve has a money supply of $40 billion and the money market is in equilibrium. a. Suppose the Federal Reserve increases the money supply by $20 billion. Use the money market and investment demand graphs to show the effects of the increase in the money supply on interest rates, money demand, and investment. Instructions: In the money market graph, use the tool provided 'MS,1' to draw a new money supply curve. Plot only the endpoints of the line (2 points total). Use the tool provided 'New Equilibrium' to plot a new equilibrium interest rate.A central bank carries out a contractionary open market operation *Another way of achieving the same thing as in an open market operation is to changethe banks’ refinancing rate. Explain carefully in which direction this rate would have tochange in order to achieve the same effect as the aforementioned contractionary openmarket operation, and how the banks’ reaction to this change brings about this effectWhat happens to the amount of money demanded or supplied in each of the following cases?Draw a separate money demand and money supply graph for each part of this question, label theaxes, and show how the change will shift the money demand and/or the money supply curve.Explain any curve shifts in each case. Show initial and final equilibrium interest rate and quantityof money.a. The Central Bank sells securities in the open market while the economy is experiencinghigh inflation. b. The Central Bank decreases the required reserve ratio during a recession.
- This question asks how the money market graph is affected by a specific event. Note that the money market graph is the graph with the money supply and money demand curves If regulation is passed that makes it more difficult for consumers to withdraw money from existing savings accounts. then how is the money market graph affected? a. increase in equilibrium interest rates, and increase in the equilibrium quantity of money O b. decrease in equilibrium interest rates, and decrease in the equilibrium quantity of money O c. decrease in equilibrium interest rates, and increase in the equilibrium quantity of money Od increase in equilibrium interest rates, and decrease in the equilibrium quantity of money O e no change in equilibrium interest rates, and no change in the equilibrium quantity of moneyExplain whether each of the following eventsincreases or decreases the money supply.a. The Fed buys bonds in open-market operations.b. The Fed reduces the reserve requirement.c. The Fed increases the interest rate it pays onreserves.d. Citibank repays a loan it had previously takenfrom the Fed.e. After a rash of pickpocketing, people decide tohold less currency.f. Fearful of bank runs, bankers decide to hold moreexcess reserves.g. The FOMC increases its target for the federalfunds rate.Construct the money market model and briefly explain each letters d,e, and fd. how a decline in real GDP(Y) will affect the equilibrium interest ratee. how an increase in the reserve requirement ratio will affect the equilibrium interest ratef. what causes interest rates to rise when there is a shortage in the money market?
- a. (i).Draw a graph showing equilibrium in the money market. Carefully label all curves andaxes and explainwhy the curves have the slopesthey do.(ii). Using the graph you prepared in a(i), illustrateand explain what happens when the Central Bankdecreases the money supply.(iii).When the Central Bankdecreases the money supply, theequilibrium level ofincome changes. Illustrate andexplain howSuppose that the economy has the following money supply and demand equations: Money Supply: M = 8000Money Demand: M= 10,000 – 40,000rwhere money is in billions of dollars and interest rates, r , is written as a decimal(e.g., an interest rate of 10% would be written as .1 in the equation).A. Determine the equilibrium interest rate and quantity of money.B. What will happen in the money market if the interest rate is currently 10%?Suppose that the economy has the following money supply and demand equations: Money Supply: M = 8000Money Demand: M= 10,000 – 40,000rwhere money is in billions of dollars and interest rates, r , is written as a decimal(e.g., an interest rate of 10% would be written as .1 in the equation).A. Determine the equilibrium interest rate and quantity of money.B. What will happen in the money market if the interest rate is currently 10%?What is the amount of excess supply of or excess demand for money?C. Show in graph that at this interest rate (10%) there is disequilibrium in themoney market.2. Assume that a particular bank has excess reserves of Php800,000 and checkabledeposits of Php1,500,000. If the reserve ratio is 20%, what is the size of the bank’sactual reserves?3. Suppose that GRAB Bank is a newly created bank in your hometown. Consider thefollowing transactions: Owners of the bank sold shares of stocks to the public (which includes owners’equity) amounting to P1,000,000. To fully…
- Consider the model of supply and demand for central bank money. Assumethat there there are commercial banks. Suppose that people hold 20% of their moneyin currency and 80% of their money in deposits. The central bank sets the reserve-todeposit ratio at 10%. In the first period, the central bank increases the supply of moneyby $200, buying bonds through Open-Market Operations. Use this information to answerthe following questions:(a) For the second period (after the central bank has injected $200 in theeconomy), calculate: (i) the demand for currency, (ii) the amount of deposit held atthe commercial banks, (iii) the demand for reserves held at the central bank, and(iv) the demand for the high-powered money. How much is the additional moneysupply created at the end of the second period?2(b) How much is the additional money supply created at the end of the thirdperiod?(c) As time continues, additional money supply will be created. Calculatethe total increase in the money supply as a…Suppose there is some hypothetical economy in which households spend $0.50 of each additional dollar they earn and save the $0.50 they have left over. The following graph plots the economy's initial aggregate demand curve (AD₂). Suppose now that the government increases its purchases by $3.5 billion. Use the green line (triangle symbol) on the following graph to show the aggregate demand curve (AD₂) after the multiplier effect takes place. Hint: Be sure the new aggregate demand curve (AD₂) is parallel to AD₁. You can see the slope of AD₁ by selecting it on the following graph. ? PRICE LEVEL 116 114 CATE 112 110 108 106 104 102 100 100 12 A AD₁ 9 10 102 104 106 108 110 OUTPUT (Billions of dollars) 112 Money Supply N 114 116 The following graph plots equilibrium in the money market at an interest rate of 6% and a quantity of money equal to $60 billion. þ † Show the impact of the increase in government purchases on the interest rate by shifting one or both of the curves on the following…Question 10a. (i).Draw a graph showing equilibrium in the money market. Carefully label all curves andaxes and explainwhy the curves have the slopesthey do.(ii). Using the graph you prepared in a(i), illustrateand explain what happens when the Central Bankdecreases the money supply.(iii).When the Central Bank decreases the money supply, the equilibrium level of income changes. Illustrate andexplain how.
