Using the money market theory, illustrate the effect of the following changes on the level of interest rates: Decrease in money demand Increase in the supply of money
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- Decrease in money demand
- Increase in the supply of money
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- Question 4 Draw diagrams illustrating the impact on the demand for money, the supply of money and the equilibrium interest rate, of each of the following. Explain what is going on in the money market in each case. (a) The central bank sells securities on the open market. (b) The economy grows (GDP increases) but the central bank moves to keep interest ratesONLY QUESTION 2 The central bank of the country is concerned about the possibility that the country is going to face a high inflation rate, and it adopted a contractionary monetary policy as a result. Analyse how the central bank policy will affect the market for bonds: price, demand, and supply of bonds (hint: refer to relationship between the interest rate and the price of bonds). Using a graph of the money market, discuss how it will affect the demand for and the supply of money. Analyse the process of achieving equilibrium in the money market.Question 3 In the country of Bithynia, the velocity of money grows at 10 percent per year. The growth rate of real GDP grows by 4 percent per year, and that of the money supply is 16 percent per year. Given that the nominal interest rate is 8 percent, what is the real interest rate?
- 1. What are the functions of money? 2. Draw diagrams illustrating the impact on the demand for money, the supply of money and the equilibrium interest rate, of each of the following. Explain what is going on in the money market in each case. (i) The central bank sells securities on the open market (ii) The economy grows (GDP increases) but the central bank moves to keep interest rates constant.Question 1 a. Increasing prices erode the purchasing power of the dollar. It is interesting to compute what goods would have cost at some point in the past after adjusting for inflation. Go to the Federal Reserve Bank of St. Louis, FRED database website at https://research.stlouisfed.org/fred2/and find the consumer price index for all urban consumers. What would a car that cost $25,000 today have cost the year 1996? b. Many countries have central banks that are responsible for their nation’s monetary policy. Go to www.bis.org/cbanks.htm and select one of the central banks (for example, ECB, Norway). Review that bank’s Web site to determine its policies regarding application of monetary policy. How does this bank’s policies compare to those of the U.S. central bank?Which one of the following statements regarding the demand for money is correct? (a) A positive relationship exists between the quantity of money demanded and the prevailing interest rate in an economy; (b) The demand for money is made up of the sum of all the money balances that participants in the economy would like to have; (c) For a given interest rate, an increase in nominal income increases the demand for money; (d) Two key factors that impact on the demand for money by individuals are savings and investments available to participants.
- Economics Suppose that there is excess supply of money at the current interest rate. During the adjustment process: a. interest rates will rise and bond prices will fall b. interest rates and bond prices will both rise c. interest rates and bond prices will both fall d. interest rates will fall and bond prices will rise Explain it correctlyQuestion 3 Which of the following is the most likely reason for a monetary policy that decreases the money supply A to increase total spending to encourage production to reduce unemployment to control inflation ©2021Illuminate EducationTM, Inc.What Is the relation between the money supply and the interest rate in an economy. Explain in detail.
- Assume the supply of money is fixed by the authorities. Show how the money market equilibrium interest rate rises when income increasesAn increase in the interest rate will cause an increase in the demand for money. True FalseProblem 2. Suppose that money demand is given by Md = $Y(0.45 – 0.4i) where $Y is $90. Answer the Following Questions: a) What is the demand for money when interest rates are zero? b) What is the smallest value of the money supply at which the interest rate is zero? c) Once the interest rate is zero, can the central bank continue to increase the money supply?