Question

Macroeconomics For each of the following scenarios, draw the graph for the market of money and the shift that occurs for each of the following scenarios. Label both axis, curves, and equilibrium. m. Government decides to buy back bonds. n. Government decides to borrow money.

*Please show different shifts for each graph answer if they are different.

Answer 1

NOTE - MONEY MARKET DIAGRAM DRAWN BELOW, THE DEMAND SCENARIO OF KEYNES IS TO MAKE YOU UNDERSTAND EXCESS DEMAND AND EXCESS SUPPLY CASE

We can take AD-AS curves in this scenario. If government decides to buy back bonds so it is kind of giving money to those people who brought the bonds from the government at a given price. Hence it is the money supply that has been increased and people have more money to spend, hence demand will increase. AD curve will move upwards increasing the output. ( Point to be noted that there is an existing excess demand situation in the economy, then and then only the government takes up an action like this ). The issue already present here is AD > Y

In the diagram, it is shown by point F, where Y1 < Y(bar) hence by boosting aggregate demand, the government pushes the output back to Y(bar) at equilibrium point E.

If government decides to borrow money then it can start selling bonds in order to suck the purchashing power of the people. The government by issuing bonds which offers higher values later lucratively attracts the people to invest in them. Hence in this way if there is excess supply in the economy or Y> AD, By taking the money away from the people, the aggregate demand reduces and it again comes back to the equilibrium.

In the graph the situation is denoted by G, where Y2> Y(bar). Hence the output is needed to be reduced, hence by selling the bonds the government moves the output back to Y(bar) as demand is decreased.

Now we want to show how money market will perform. As we saw that due to an increase in money (because government brought back bonds), there was an increase in demand, due to which output increased, here in the money market we have shown the increase in the money supply by the shift of the LM curve towards the right increasing the output from Y0 to Y1 and decreasing the interest rates from r0 to r1

And when we have a situation where government wants to borrow money, then they sell out bonds which decrease the money supply shifting the LM curve towards the left decreasing the output from Y0 to Y2 and increasing the interest rate from r0 to r2.