The table below shows money demand and supply schedules for a hypothetical economy, Argentia. Nominal Interest Rate
Question:
The table below shows money demand and supply schedules for a hypothetical economy, Argentia.
Nominal Interest Rate (%) | Money Demanded (Dm0) ($ billions) | Money Supplied (Sm0) ($ billions) |
| 4 | 5 | 20 |
| 3 | 20 | 20 |
| 2 | 40 | 20 |
| 1 | 80 | 20 |
| 0 | - | 20 |
a. Draw a graph showing Dm0 and Sm0.
f the interest rate is initially 4% the quantity of money supplied (Click to select) exceeds falls short of quantity demanded. Wealth holders respond to this (Click to select) shortage surplus in the money market by (Click to select) buying selling bonds. This pushes (Click to select) down up bond prices and (Click to select) raises reduces the interest rate until equilibrium in the money market is reached.
If the interest rate is initially 1%, the quantity of money supplied (Click to select) falls short of exceeds quantity demanded. Wealth holders respond to this (Click to select) shortage surplus in the money market by (Click to select) buying selling bonds. This pushes (Click to select) down up bond prices and (Click to select) raises reduces the interest rate until equilibrium in the money market is reached.
d. If the money supply increases by $20 billion at each possible interest rate then the money supply (Click to select) falls short of exceeds money demand at the initial equilibrium interest rate. Wealth holders respond to this (Click to select) shortage surplus in the money market by (Click to select) buying selling bonds. This pushes (Click to select) down up bond prices and (Click to select) raises reduces the interest rate until a new equilibrium in the money market is reached at an interest rate of %.
Draw the new money supply curve Sm1 on your graph. Plot only the 2 endpoints when the interest rate is 4% and 0%.
e. If the money supply stays at Sm1 and money demand increases by $20 billion at each possible interest rate then the money supply (Click to select) falls short of exceeds money demand at the initial equilibrium interest rate of part (d). Wealth holders respond to this (Click to select) shortage surplus in the money market by (Click to select) buying selling bonds. This pushes (Click to select) down up bond prices and (Click to select) raises reduces the interest rate until a new equilibrium in the money market is reached at an interest rate of %.
Draw the new money demand curve Dm1 on your graph. Plot all 4 points for the money demand curve Dm1.
f. If real output in the economy increases the equilibrium interest rate (Click to select) falls rises .
If the price level in the economy decreases the equilibrium interest rate (Click to select) falls rises .
Expert Answer:
Answering your questions about the money market in Argentia a Draw a graph showing Dm0 and Sm0 This requires plotting the nominal interest rate on the ... View the full answer
