EC233 Lecture Notes - Lecture 5: Demand Shock, Money Supply, Liquidity Preference

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turquoisewasp140

6 Dec 2020

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Document Summary

Changes in equilibrium interest rates in the liquidity preference. Framework will shift the supply curve for money to the right (s >) In the simple keynesian liquidity preference framework here, the only alternative asset to money consists of bonds: in this framework, as an alternative to examining bond market to analyse interest rates, one can examine the money market. Shifts in the supply of money: assume the supply of money is controlled by the central bank, an increase in the money supply engineered by the central bank. Interest-rate response to a change in real income or the price level response to a change in the money supply. A one-time increase in the money supply will eventually lead prices to rise to a permanently higher level. Expected-inflation effect on interest rates therefore persists only as long as the price level continues to rise. Does a higher rate of growth of the money supply lower interest.

Related Questions

In the liquidity-preference framework, suppose that the Fed changes the money supply to keep the nominal interest rate unchanged whenever the demand for money shifts. Show what happens to the quantity of money and the nominal interest rate if the money-demand curve shifts to the right.

Suppose that the liquidity effect is small, people monitor changes in the money supply carefully, and prices and inflation expectations adjust rapidly. In this situation, describe the movement of the nominal interest rate when there is a permanent decline in the growth rate of the money supply.

Part 1

Evaluate whether each of the following statements is true or false. Explain your answer and provide a supporting rationale.

a.The short-run aggregate supply (SAS) curve slopes upward because households spend more as their incomes increase.

b.The long-run aggregate supply curve can never shift.

c.Either a decrease in the nominal money supply by the Federal Reserve, all else held constant or an increase in the price level, all else held constant, will shift the aggregate demand (AD) curve to the left.

d.The Keynesian portion of the short-run aggregate supply (SAS) curve would be relevant during a recessionary situation.

e.Stagflation occurs when the aggregate demand (AD) curve shifts out on the upward sloping portion of the short-run aggregate supply (SAS) curve.

Part 2

Evaluate whether each of the following statements is true or false. Explain your answer and provide a supporting rationale, using graphs to support your answer. You can create graphs by hand and take pictures and upload them with your answers, or you may use Word or Excel, and upload the file created by these software packages.

a.If the real money demand is greater than the real money supply, interest rates must rise to reach equilibrium in the money market as institutions sell bonds to obtain more money.

b.The federal government's control of the money supply, which influences interest rates, is the primary tool that policymakers use to impact the macroeconomy.

c.A decrease in the reserve requirement decreases the money supply because banks have fewer reserves.

d.The real money demand curve shows how households and businesses change their spending in response to changes in the interest rate.

e.Both an increase in the nominal money supply by the Federal Reserve and an increase in the price level will cause the real money supply curve to shift to the right.