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Interpret the following graph showing the potential changes in supply of money compared to the demand for money. The demand for money is represented by line MD and the initial supply of money is represented by line MS. Then answer the questions below.

Change in Interest Rates

Find the new equilibrium points

1. If there is no change in the interest rates, where is the equilibrium point? What is the interest rate?

2. If there is a decrease in the supply of money, where is the new equilibrium point? What is the interest rate?

3. If there is an increase in the supply of money, where is the new equilibrium point? What is the interest rate?

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Bunny Greenfelder
Bunny GreenfelderLv2
25 Jun 2018

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Related questions

LM CURVE

The demand for money is L(R,Y) = 10Y - .5R

M2 Billions CPI Interest Rate

8,400 210 4

1a. Derive the LM Curve.

1b. Find the equilibrium level of income (a number)

c. If the interest rate increases by 1%, how much does the demand for real money balances change?

3. If government spending is decreased, explain and show in the graph the new equilibrium

4. If the money supply is decreased, explain, and show in the graph the new equilibrium.

Money
Supply 		Money
Demand 		Interest
Rate 		Investment at Interest
Rate Shown 		Potential Real GDP Actual Real GDP at Interest
Rate Shown
$500 $800 3% $80 $350 $390
500 700 4 70 350 370
500 600 5 60 350 350
500 500 6 50 350 330
500 400 7 40 350 310

1. What is the equilibrium interest rate in Moola? %

2. What is the level of investment at the equilibrium interest rate? $

3. There is a recessionary output gapinflationary output gap of $______ billion.

Given money demand, by how much would the Moola central bank need to change the money supply in order to close the output gap?

4. IncreaseDecrease the money supply by $________ billion

5. What is the (expenditure) multiplier in Moola?

In a third world country, the central bank wants to reduce the inflation rate by 5%. The current money supply is $2.0 trillion and the goal is to have equilibrium in the money market (Ms=Md). What should be the new target interest rate to reduce the inflation rate by 5% and to keep the money market in equilibrium? Use the quantity theory of money model (M*V=P*Y, or M*V=P*Q) and assume that V and Y (or Q) are constant. The estimated money demand function is given as:

Md = 10-0.7i.

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