Hey Guys! I am having so much trouble with this econ question and would love hel
ID: 1201914 • Letter: H
Question
Hey Guys! I am having so much trouble with this econ question and would love help!
Thank you so much in advance!
The following graph shows the money market in a hypothetical economy. The central bank in this economy is called the Fed. Assume that the Fed fixes 0 the quantity of money supplied. Suppose the price level decreases from 90 to 75. Shift the appropriate curve on the graph to show the impact of a decrease in the overall price level on the market for money. Money Supply Money Demand Money Supply MD1 2 MD2 20 30 40 50 60 2 MONEY (Billions of dollars)Explanation / Answer
1. When the price level in the economy falls, the demand for money also falls as now lesser amount of money is required to make the transactions or the purchasing power has increased.
The money demand curve shifts out to left from MD1 to MD2 at the same money suply curve.
2.a. Lesser than.
Because the purchasing power has increased, so less money is demanded at each interest rates.
b. reduce.
The extra money in hand, due to lower prices, would induce people to save.
c. buy
alternate to holding money is to buy bonds and other interest bearing assets.
d. reduce.
Demand for bonds has gone up.
e. 4%
where MD2 equals money supply.
3. There'll be a movement along the curve, the new point would be at $75 price level and 70 units of output.
a. Increase.
The cost of borrowing has reduced, the investment would increase.
b. increase.
As investment increases, thye output produced in the economy would increase.