1. Draw a correctly labeled graph of the money market and show the effect of the...

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1. Draw a correctly labeled graph of the money market and show the effect of the reduced holdings of money on the equilibrium nominal interest rate in the short run. 2. Based on the change in the interest rate in part (1), what will happen to each of the following in the short run? 1. Prices of previously issued bonds 2. The price level and real income. Explain. 3. With a constant money supply, based on your answer to part 2(2), will the velocity of money increase, decrease, or remain the same, or is the change indeterminate? 4. Assume the country's banking system has limited reserves. If the central bank wishes to reverse the change in the interest rate identified in part (1), what open market operation would it use? 1. Draw a correctly labeled graph of the money market and show the effect of the reduced holdings of money on the equilibrium nominal interest rate in the short run. 2. Based on the change in the interest rate in part (1), what will happen to each of the following in the short run? 1. Prices of previously issued bonds 2. The price level and real income. Explain. 3. With a constant money supply, based on your answer to part 2(2), will the velocity of money increase, decrease, or remain the same, or is the change indeterminate? 4. Assume the country's banking system has limited reserves. If the central bank wishes to reverse the change in the interest rate identified in part (1), what open market operation would it use?

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1 Money Market Graph In the money market graph the vertical axis represents the nominal interest rate and the horizontal axis represents the quantity ... View the full answer