Scribd
Upload
72 views3 pages

Macro Chap 12 Exercise Macsg12 Aggregate Demand in The Money Goods and Current Markets

This document summarizes the key points from Chapter 11 of an economics textbook on money demand and the equilibrium interest rate. It provides sample exercises and solutions on how shifts in monetary policy or economic conditions can impact the money demand and supply curves, and thus the equilibrium interest rate. For each scenario described in parts (a) through (f) of Exercise 1, it shows the money demand and supply curves initially and after the shift, and explains how the interest rate would change. Exercise 2 then lists additional scenarios and indicates whether each one would increase or decrease money demand, along with brief explanations.

Uploaded by

AA BB MM
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
72 views3 pages

Macro Chap 12 Exercise Macsg12 Aggregate Demand in The Money Goods and Current Markets

This document summarizes the key points from Chapter 11 of an economics textbook on money demand and the equilibrium interest rate. It provides sample exercises and solutions on how shifts in monetary policy or economic conditions can impact the money demand and supply curves, and thus the equilibrium interest rate. For each scenario described in parts (a) through (f) of Exercise 1, it shows the money demand and supply curves initially and after the shift, and explains how the interest rate would change. Exercise 2 then lists additional scenarios and indicates whether each one would increase or decrease money demand, along with brief explanations.

Uploaded by

AA BB MM
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 3

Chapter 11

Money Demand and the equilibrium interest rate

Exercise 1
What happens to the amount of money demanded or supplied in each of the following cases?
Draw a separate money demand and money supply graph for each part of this
question, label the axes, and show how the change will shift the money demand
and/or the money supply curve. Explain any curve shifts in each case. Show initial
and final equilibrium interest rate and quantity of money.

(a) The Fed sells securities in the open (b) The Fed decreases the required reserve
market while the economy is ratio during a recession.
experiencing high inflation.

(c) During a deep recession, the Fed (d) A rise in nominal GDP is accompanied
moves to hold the interest rate by an increase in the discount rate.
constant.

(e) The Fed conducts an open market (f) The economy moves into a downturn,
purchase of securities, and banks and the commercial banks become more
begin imposing a $50 charge on all cautious in their lending policies.
returned checks.
Refer to the following solutions.
(a) The Fed sale reduces the money (b) The decrease in the required reserve
supply; the rising price level will ratio will increase the money supply.
increase money demand. The two Money demand will decrease during the
changes will drive the interest rate recession. Together, the changes will
higher. lower the interest rate.
r M 2s M 1s r M 1s M 2s

r2 r1

M 2d M 1d
r1 r2
M 1d M 2d
0 M 0 M

(c) During a deep recession, money (d) A rise in nominal GDP will increase the
demand will shift left (decrease). demand for money. An increase in the
This will decrease the interest rate. discount rate will decrease the money
The Fed must reduce the money supply. Together, the changes will
supply to hold the interest rate increase the interest rate.
constant.
r M 2s M 1s r M 2s M 1s

r2
r1 = r2
M 2d
M 1d r1
M 1d
M 2d
0 M 0 M

(e) The open market purchase of (f) The downturn in the economy will
securities will increase the money decrease the demand for money; the
supply. The $50 bank charge will new caution in lending will increase
either encourage individuals to use excess reserves, decrease the money
cash more or to keep more funds in multiplier, and reduce the money
their (M1) checking accounts. The supply. The effect on the interest rate is
effect on the interest rate is ambiguous.
ambiguous.
r M 1s M 2s r M 2s M 1s

r1 = r2 r1 = r2

M 2d M 1d
M 1d M 2d
0 M 0 M
Exercise 2
Will money demand increase (I) or decrease (D) in each of the following cases?
(a) The price level rises.
(b) New technology makes access to the stock market instantaneous
using a home computer.
(c) More credit cards are accepted.
(d) It is arranged nationally that all bills and income will be received on
the first day of each month.
(e) The nominal GDP level increases.
(f) Weakening of strict regulation of the financial sector makes buying
bonds more risky.
(g) Banks begin to require a $1,000 minimum balance to be kept in
checking accounts at all times.

(a) I. Volume of transactions has a positive effect on money demand.


(b) D. The transactions cost of transferring funds has become less, so
withdrawals of money will be more frequent but less sizable. Refer to
p. 207 [519].
(c) D. As credit cards are used more, cash will be used less.
(d) D. This new national arrangement reduces the problem of
nonsynchronization. Money holdings needed to pay the flow of bills
will be reduced.
(e) I. Volume of transactions has a positive effect on money demand. Refer
to p. 210 [522].
(f) I. There will be more reluctance to hold bonds and less reluctance to
hold money.
(g) I. This is a transactions cost.

You might also like