While all other factors are constant, in the money market of the following applications, balance interest...

While all other factors are constant, in the money market of the following applications, balance interest rate and

how and by which mechanisms will affect aggregate demand (investment and consumption expenditures)

explain reasonably.

a) Widespread practice of paying by credit card in taxis

b) Central Bank decreasing the required (legal) provision ratio

c) Central Bank selling bonds in the market through open market transactions . please write on online , not paper

Expert Solution

(a)

Higher credit card payment will decrease the demand for money. The money demand curve shifts leftward, decreasing interest rate.

Lower interest rate boosts investment and the portion of consumption funded by borrowing. Higher investment and consumption will increase aggregate demand. AD curve will shift to right, increasing both price level and real GDP.

(b)

Lower reserve ratio will increase the supply of money. The money supply curve shifts rightward, decreasing interest rate.

Lower interest rate boosts investment and the portion of consumption funded by borrowing. Higher investment and consumption will increase aggregate demand. AD curve will shift to right, increasing both price level and real GDP.

(c)

Open market sale of bonds will decrease the supply of money. The money supply curve shifts leftward, increasing interest rate.

Higher interest rate dampens investment and the portion of consumption funded by borrowing. Lower investment and consumption will decrease aggregate demand. AD curve will shift to left, decreasing both price level and real GDP.

Rahul Sunny answered 2 years ago

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