Question

In: Economics

The following diagram represents the money market in the United States. Suppose that the United States is a closed economy that does not interact with other economies in the world.


5. Changes in the money supply 


The following diagram represents the money market in the United States. Suppose that the United States is a closed economy that does not interact with other economies in the world. The money market is currently in equilibrium at an interest rate of 5.50%, and the quantity of money in the economy is $1 trillion, as indicated by the grey star. 

image.png


Suppose the Fed announces that it is raising its target interest rate by 50 basis points, or 0.50%. To do this, the Fed will use open market operations to _______ the public in order to _______ the _______ money.


 Use the green line (triangle symbols) on the previous graph to illustrate the effects of this policy by placing the new money supply curve (MS) in the correct location. Place the black point (X symbol) at the new equilibrium interest rate and quantity of money.


 Suppose the following graph shows the aggregate demand curve for the U.S. economy. The Fed's policy of targeting a higher interest rate will _______ the cost of borrowing, causing investment spending to _______  and the quantity of output demanded to _______  at each aggregate price level. Shift the curve on the graph to show the general impact of the Fed's new interest rate target on aggregate demand.


Tool tip: Click and drag the curve. The curve will snap into position, so if you try to move the curve and it snaps back to its original position, just try the cost of borrowing, causing investment spending to and the quantity of output demanded to at again and drag it a little farther. 

image.png

Solutions

Expert Solution

New interest rate = 5.50+0.50 = 6%

Blanks:

1- Decrease

2- Supply of

3- Selling bonds to

4- Increase

5- Decrease

6- Decrease

When interest rate increases, the aggregate demand will decrease and the AD curve will shift to the left.


Related Solutions

The following diagram represents the money market in the United States, which is currently in equilibrium,...
The following diagram represents the money market in the United States, which is currently in equilibrium, as indicated by the grey star Suppose the Federal Reserve (the Fed) announces that it is raising its target interest rate by 25 basis points, or 0.25%. It would achieve this by the .Use the green line (triangle symbols) on the preceding graph to illustrate the effects of this policy. Place the black point (plus symbol) on the graph to indicate the new equilibrium interest...
The following diagram represents the money market in the United States, which is currently in equilibrium, as indicated by the grey star.
The effect of changes in the money supply The following diagram represents the money market in the United States, which is currently in equilibrium, as indicated by the grey star.  Suppose the Federal Reserve (the Fed) announces that it is raising its target interest rate by 50 basis points, or 0.50%. It would achieve this by _______  the _______ . Use the green line (triangle symbols) on the preceding graph to illustrate the effects of this policy. Place the black point (plus symbol)...
The following diagram represents the money market in the United States, which is currently in equilibrium, as indicated by the grey star.
2. Equilibrium and disequilibrium in the money marketThe following diagram represents the money market in the United States, which is currently in equilibrium, as indicated by the grey star. Suppose the Federal Reserve (the Fed) announces that it is lowering its target interest rate by 50 basis points, or 0.50%. It would achieve this by _______  the _______ . Use the green line (triangle symbols) on the preceding graph to illustrate the effects of this policy. Place the black point (plus symbol)...
The following diagram represents the money market in Australia.
2. The impact of monetary policy using the AD-AS model The following diagram represents the money market in Australia. Imagine that Australia is a closed economy that does not interact with other economies in the world. The money market is currently in equilibrium at an interest rate of 6.00%, and the quantity of money in the economy is $1 trillion, as indicated by the grey star. Imagine the Reserve Bank of Australia (RBA) announces that it is lowering its target interest rate...
Suppose there are two closed economies: Economy A and Economy B. Economy A has a high...
Suppose there are two closed economies: Economy A and Economy B. Economy A has a high average rate of time preference relative to economy B’s low average rate of time preference. (1) Describe the differences you would expect to see with respect to interest rates and levels of investment in the two economies. (2) Describe what would occur if these countries were open to international capital flows. (This is the key to answering Bernanke’s question)
Suppose there are two closed economies: Economy A and Economy B. Economy A has a high...
Suppose there are two closed economies: Economy A and Economy B. Economy A has a high average rate of time preference relative to economy B’s low average rate of time preference. (1) Describe the differences you would expect to see with respect to interest rates and levels of investment in the two economies. (2) Describe what would occur if these countries were open to international capital flows. (This is the key to answering Bernanke’s question)
Suppose there are two closed economies: economy a and b. Economy a has a high average...
Suppose there are two closed economies: economy a and b. Economy a has a high average rate of time preference relative to economy B’s low average rate of time preference. (1) describe the differences you would expect to see with respect to interest rates and levels of investment in the two economies. (2) describe what would occur if these countries were open to international capital flows.
Which of the following represents an important difference between the United States and a socialist economy?...
Which of the following represents an important difference between the United States and a socialist economy? In the U.S., most forms of capital are available to private ownership; in a socialist system, they are generally not. In a socialist system, the government conducts extensive research activities; in the U.S., it does not. The U.S. is an example of pure capitalism; a socialist system is an example of mixed capitalism. In a socialist system, the government decides how much of each...
True or False: Of the major economies in the world, the United States had the highest...
True or False: Of the major economies in the world, the United States had the highest growth rate of real GDP per capita between 1982 and 2009. ・True ・False Japan experienced average annual real GDP per capita growth of 2.0% between 1982 and 2009. Which of the following helped most to contribute to that growth? ・Redistributive policies designed to decrease poverty ・Privatization of previously nationalized industries ・Spending on research and development
Suppose a closed economy (economy that does not engage in international trade) is described by the following table.
Suppose a closed economy (economy that does not engage in international trade) is described by the following table. Year Potential GDP Real GDP Price Level1 $1600 billion $1600 billion 100 2 $1650 billion $1620 billion 109 a. What problem will occur in the economy in Year 2 if no policy is pursued? b. Describe the fiscal policy tools that could be used to combat the problem. Carefully explain all steps in the link between policy and outcomes. What impact will this policy have on...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT