Exhibit 1 Money market demand and supply curves MS MS2 20 Interest 15 E rate (pe

Question

Exhibit 1 Money market demand and supply curves MS MS2 20 Interest 15 E rate (percent) 10 Ea MD 0 50 100 150 200 Quantity of money (billions of dollars) 1. In Exhibit 1, assume an equilibrium with an interest rate of 15 percent and the money supply at $100 billion. The Fed uses its policy tools to move the economy to a new equilibrium at Ez with money supply of $150 billion and an interest rate of 10 percent. This change could be the result of a(n): a. open market sale of securities by the Fed. b. higher discount rate set by the Fed. c. higher required-reserve ratio set by the Fed. d. open market purchase o securities by the Fed. e. higher discount rate and higher reserve requirement set by the Fed. 2. As shown in Exhibit 1, assume the money supply curve shifts rightward from MS, to MS, and the economy is operating along the intermediate segment of the aggregate supply curve. The result will be a: ( a. higher investment, lower real GDP, and lower price level. b. lower investment, lower real GDP, and lower price level. c. higher investment, higher real GDP, and higher price level. d lower investment, higher real GDP, and lower price level. e higher interest rate and no effect on real GDP or the price level.

Explanation / Answer

1.If FED wants to increase money supply they will buy securities through open market operations.In this case money supply has increased so correct option is d open market purchase.

2.An increase in money supply along with a lower interest rate will increase investment.Consumers will have more money in hand which will increase spending.If aggregate demand is increasing price level will increase too.So correct option is c.

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.