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If the Money Supply is less than Money Demand, what will the bank of Canada do in order to maintain their target interest rate? And if the Money Supply is greater than Money Demand?

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Anne Gillian Duero
Anne Gillian DueroLv10
28 Sep 2019

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Related questions

Money Control / Market Interest Rate/ Money Supply Versus Interest Rate Targets

1. (Money Demand) Suppose the money supply is currently $ 500 billion and the Fed wishes to increase it by $ 100 billion.

a. Given a required reserve ratio of 0.25, what should it do?
b. If it decided to change the money supply by changing the required reserve ratio, what change should it make? Why may the Fed be reluctant to change the reserve requirement?

2. (Market Interest Rate): With a diagram, show how the supply of money and the demand for money determine the rate of interest? Explain the shapes of the supply curve and the demand curve?

3. (Money Supply Versus Interest Rate Targets) Assure that the economy's real GDP is growing:
a. What will happen to money demand over time?
b. If the Fed leaves the money supply unchanged, what will happen to the interest rate over time?
c. If the Fed changes the money supply to match the change in money demand, what will happen to the interest rate over time?
d. What would be the effect of the policy described in part (c) on the economy's stability over the business cycle?

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

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 macro economy.

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.

The economy of Elmendyn contains 2,000 $1 bills.

a) If people hold all money as currency, what is the money supply?

b) If people hold all money as demand deposits and banks maintain 100 percent reserves, what is the quantity of money?

c) If people hold equal amounts of currency and demand deposits and banks maintain 100 percent reserves, what is the quantity of money?

d) If people hold all money as demand deposits and banks maintain a reserve ratio of 10 percent, what is the quantity of money? If the reserve ratio is 20 percent, what then is the money supply?

e) If people hold equal amounts of currency and demand deposits and banks maintain a reserve ratio of 10 percent, what is the quantity of money?

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