Question

In: Economics

Using a money market graph explain what happened to money supply, price level and the value...

  1. Using a money market graph explain what happened to money supply, price level and the value of money, if
  1. the Central Sells bonds (10 points)

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b. As a result of Coronavirus, Kuwaiti citizens sell their properties in overseas and bring the capital to Kuwait

Solutions

Expert Solution

a) If Central bank sells bonds to the public, they will accept money in exchange of it which helps central banks in absorbing all extra cash from the economy and reduces the money supply. As people have less money in their hands to spend on goods and services which will reduce their willingness to pay for goods and services and reduce the aggregate demand in the economy.

A fall in aggregate demand cause price level to fall in the economy. As price level fall, value of money rises because value of money is calculated 1 / Price of good.

b) If Kuwaiti investors are selling their foreign properties and bringing your money back, it will raise the money supply in the economy.

A rise in money supply gives more money in the hands of people and raises their willingness to pay for goods and services in the economy which result in rise in aggregate demand in the economy which raise the price level from P to P1. A rise in price level reduces the value of money because of their inverse relation.


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