Question

In this hypothetical scenario, lets say money demand exceeds money supply, what would occur if the...

In this hypothetical scenario, lets say money demand exceeds money supply, what would occur if the Federal Reserve did nothing in response to this increase? Why would price levels decrease as a result, and be a bad thing. In the MD and MS graph, would an increase in money demand due to an expected future increase in earnings cause movement along MD curve or a shift, and without a following shift in Money supply, how would that cause price levels to increase?

Homework Answers

Answer #1

Money supply and money demand interact with each other in the money market to determine the market interest rate and the level of real money balances. At the current interest rate assume that market demand for money exceeds the given money supply. This implies that borrowers are demanding more money while there is not enough excess reserves available at the bank. Competition among the borrowers will increase the the rate of interest charged on loans so that banks will now demand a higher rate of interest.

Becauseinterest rate is now increased, the price of bonds will fall. We know that interest rate is negative related with the price level so that when interest rate is increasing the price level of bonds will fall.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
The interest rate effect on aggregate demand indicates that a(n): A. Decrease in the price level...
The interest rate effect on aggregate demand indicates that a(n): A. Decrease in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending B. Decrease in the price level will decrease the demand for money, decrease interest rates, and increase consumption and investment spending C. Increase in the price level will increase the demand for money, reduce interest rates, and decrease consumption and investment spending D. Increase in the supply of money...
Which of the following actions would cause an increase to the money supply? A. The New...
Which of the following actions would cause an increase to the money supply? A. The New York Fed trading desk sells Treasury securities in the secondary market. B. The Federal Reserve Board of Governors raises the discount rate. C. The New York Fed trading desk purchases Treasury securities in the secondary market. D. The Federal Reserve Board of Governors raises the reserve requirements. E. both (C) and (D).
Macroeconomic question 1."An increase in the money supply will always be inflationary and cause prices to...
Macroeconomic question 1."An increase in the money supply will always be inflationary and cause prices to rise" true or false? illustrate and explain and be sure to distinguish between the short run and the long run. 2.illustrate and explain the shape of the interest sensitive demand for money function including what is involved in a movement along versus a shift in the function. 3.if the bank of Canada sells some of its holdings of bonds to the chartered banks, the...
1. What would happen to the aggregate supply curve if worker productivity increased as a result...
1. What would happen to the aggregate supply curve if worker productivity increased as a result of increased training and education?    2. Which of the following could lead to inflation?         An increase in aggregate supply         An increase in aggregate demand         A decrease in aggregate supply         A decrease in aggregate demand    3. If the price level rises and the money wage rate stays the same, what effect will this have upon labor demanded and production?...
4. If money supply and money demand both increase by same amount, what would be the...
4. If money supply and money demand both increase by same amount, what would be the effect on real GDP? a. Real GDP would decrease. b. Real GDP would increase c. Real GDP would not change. d. None of the above.
1. The aggregate demand would shift to the right if: a. the money supply increases. b....
1. The aggregate demand would shift to the right if: a. the money supply increases. b. the Cambridge “k” increases. c. an increase in government spending is 100% offset by a decrease in consumer spending. d. foreign sector spending falls. e. All of the above. 2. The short run aggregate supply is viewed as upward sloping: a. showing that higher prices will lead to higher production. b. because it takes a while for wages to rise when prices rise. c....
1. i) Let's consider a hypothetical economy where this year's money supply is Tk. 300, nominal...
1. i) Let's consider a hypothetical economy where this year's money supply is Tk. 300, nominal GDP is Tk. 80000 and real GDP is Tk. 2000. a) What does the quantity theory of money say? b) Calculate the price level. c) Calculate the velocity of money d) Show stage b on a graph. ii) Describe briefly the tools the central bank uses to control the money supply in the economy, 3. a) Suppose economists observe that an increase in government...
Question 1 In what ways does technology impact labor demand? That's not right. It increases demand...
Question 1 In what ways does technology impact labor demand? That's not right. It increases demand for certain types of workers. It decreases demand for certain types of workers. It increases demand for all workers. It decreases demand for all workers. 2 question Which of the following factors would not cause the supply of labor to shift? an increase in the amount of education required to perform a job implementation of a new government program that offers child care benefits...
We discussed numerous times the importance of identifying shocks to money demand. In particular, we argued...
We discussed numerous times the importance of identifying shocks to money demand. In particular, we argued that the policy implications of shocks to money demand differ based on whether the shock to money demand was real or portfolio. a) (5 points) Let us consider a portfolio shock that increases money demand, say due to non-monetary assets becoming riskier and less liquid. Draw a real money demand and real money supply diagram locating the initial equilibrium point as point A and...
The main advantage of using the interest rate, rather than the money supply, as the policy...
The main advantage of using the interest rate, rather than the money supply, as the policy instrument in the dynamic AD–AS model is that it is more realistic. Today, most central banks, including the Federal Reserve, set a short-term target for the nominal interest rate. Keep in mind, though, that hitting that target requires adjustments in the money supply. For this model, we do not need to specify the equilibrium condition for the money market, but we should remember that...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT