FRQ # 3

 

A drop in credit card fees causes people to use credit cards more often for transactions and demand less money.

1. How will that affect the  nominal interest rate?.

 

1. Given the interest rate change in part (a), what will happen to bond prices in the short run?

 

1. Given the interest rate change in part (a), what will happen to the price level in the short run? Explain.

 

1. Identify an open-market operation the Federal Reserve could use to keep the nominal interest rate constant at the level that existed before the drop in credit card fees. Explain. 

 

The Federal Reserve expands the money supply by 5 percent:

a. Use the theory of liquidity preference to illustrate in a graph the impact of this policy on the interest rate.
b. Use the model of aggregate demand and aggregate supply to illustrate the impact of this change
in the interest rate on output and the price level in the short run.
c. When the economy makes the transition from its short-run equilibrium to its new long-run equilibrium, what will happen to the price level?
d. How will this change in the price level affect the demand for money and the equilibrium interest rate?
e. Is this analysis consistent with the proposition that money has real effects in the short run but is neutral in the long run?

What will happen to the nominal interest rate and the equilibrium quantity of money due to the following changes?

a) A decline in people's income

b) An increase in the level of prices

c) A decline in the supply of money