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 by 25 basis points, or 0.25%. To do this, the RBA will use open market operations to sell bonds to the public in order to increase 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.

Imagine the following graph shows the aggregate demand curve for the Australian economy. The RBA's policy of targeting a lower interest rate will the cost of borrowing, causing residential and business investment spending to a and the quantity of output demanded at each price level. Shift the curve on the graph to show the general impact of the RBA's new interest rate target on aggregate to 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 again and drag it a little farther.

Solutions

Expert Solution

(1) To lower interest rates, RBA will purchase bonds from public to increase the supply of money.

(2) New MS curve as follows.

(3) Policy of lower interest rate will decrease cost of borrowing, causing investment spending to increase and quantity of output demanded to increase.

(4) Higher investment and aggregate demand will shift AD curve rightward as follows.

Rahul Sunny answered 2 years ago

Next > < Previous

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)...

When the money market is depicted in a diagram with the value of money on the...

When the money market is depicted in a diagram with the value of money on the vertical axis, which of the following happens if the price level is above the equilibrium level? a. There is a shortage, so the price level will fall. b. There is a shortage, so the price level will rise. c. There is a surplus, so the price level will rise. d. There is a surplus, so the price level will fall.

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. Suppose the Fed announces that it is raising its target interest rate by 50 basis points,...

Consider the market for renewable energy in Australia. In a demand and supply diagram, illustrate the...

Consider the market for renewable energy in Australia. In a demand and supply diagram, illustrate the impact of each of the following economic events on the equilibrium price and quantity( show initial equilibrium as A and final as B). Identify the condition(s) of demand and supply and briefly explain the process of moving from the initial to final equilibrium. QUESTION: 1. The Andrew's government completed 3 new solar and wind farms. 2.The Federal government increase subsidies and incentives to renewable...

Using the diagram that represents an equilibrium in the asset market, as used in chapter 15...

Using the diagram that represents an equilibrium in the asset market, as used in chapter 15 and 18, graphically illustrate how the home (US) central bank will respond to an increase in the foreign money supply (euro), if exchange rates are fixed. Make sure you identify which step goes first, second, etc. Label all diagrams. (10 points).

Use IS-LM-FX diagram to show in the product market, Money market, and the foreign market for...

Use IS-LM-FX diagram to show in the product market, Money market, and the foreign market for home country. Label your graphs and use solid lines. Suppose the home country imposes a tariff that significantly reduces its imports. How would that affect the current account ? Using dashed lines for any shifted curves, show how this would affect interest rate, income and exchange rate? (10p) a. Suppose that the above tariff was expected to be permanent. How would this affect future...

a. Draw a carefully labeled money market diagram to show the initial equilibrium of the quantity...

a. Draw a carefully labeled money market diagram to show the initial equilibrium of the quantity of money and the price level. b. Now suppose that changes in bank regulations expand the availability of credit cards, so the people need to hold less cash. Show (on the same diagram you drew above in part a) and explain how this will affect the demand for money. c. If the Bank of Canada wants to keep price level stable, what should it...

Using the money market/foreign exchange market diagram, briefly explain how the AA curve will shift when...

Using the money market/foreign exchange market diagram, briefly explain how the AA curve will shift when there is an increase in money supply.

Subjects