Question

Explain how the following will affect the supply of money, the demand for money, and the interest rate. Illustrate your answers with diagrams.

A. BNM’s securities traders buy securities in open-market operations.

B. An increase in credit card availability reduces the cash people hold.

C. The BNM reduces banks’ reserve requirements.

D. Malaysian households decide to hold more money to use for holiday shopping.

E. A strong optimism boosts business investment and expands aggregate demand

Answer 1

Ans

A) Open market purchase leads to increase in money supply causing increase in interest rate at given money demand.

B) Increase in availability of credit cards will decrease the demand for money which will decrease the interest rate for given money supply.

C) Reduction in reserve requirements leads to increase in money supply which increases interest rate at given money demand.

D) If more money is held by public, it leads to increase in money demand increasing interest rate at given money supply.

E) An increase in aggregate demand increases transaction demand for money increasing interest rate at given money supply.

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