Use a money market diagram (which shows a vertical supply of money curve and a downward sloping demand curve) to describe what will happen to the interest rate in the cases noted below. Make sure you can identify excess reserves or excess demand for money at the original interest rate. Like all economic problems, start at equilibrium, institute the change and explain why you move to the new equilibrium, then go to the new equilibrium. (10 marks) 

(i) Savings function shifts down. 

(ii) The Bank of Canada buys treasury bills on the open market. 

(iii) Speculative demand for money curve shifts to the left. 

(iv) Moral suasion suggests banks should increase their loans. 

(v) Investment increases.

Answer rating: 100% (QA)

To address each case using a money market diagram i Savings function shifts down Start at equilibrium with a vertical supply of money intersecting a d... View the full answer