Question

1. Which of the following events would cause a decrease in the equilibrium interest rate in the short-run money market? For each event, simply state YES or NO.

a. The price level increases, Ceteris Paribus.

b. The FOMC conducts open market sales of existing bonds, Ceteris Paribus.

c. The aggregate demand shifts to the left, Ceteris Paribus.

d. The Fed increases the required reserve ratio, Ceteris Paribus.

e. The Fed increases the money supply, Ceteris Paribus.

f. The money demand curve shifts left, Ceteris Paribus.

Answer 1

a. The price level increases will increase demand for money balances so that demand shifts right and equilibrium interest rate is increased. NO

b. The FOMC conducts open market sales of existing bonds, Ceteris Paribus. This will reduce money supply and equilibrium interest rate is increased. NO

c. The aggregate demand shifts to the left, Ceteris Paribus. Income is reduced and so demand  for money balances falls so that demand shifts left and equilibrium interest rate is decreased. YES

d. The Fed increases the required reserve ratio, Ceteris Paribus. This reduces money supply and so equilibrium interest rate is increased. NO

e. The Fed increases the money supply, Ceteris Paribus. Money supply curve shifts right and equilibrium interest rate is decreased. YES

f. The money demand curve shifts left, Ceteris Paribus. YES