In the long run the interest rate adjusts to adjusts to balance the supply and demand for loanable funds. In the short run, the interest rate adjusts to balance the supply and demand for money. Discuss.

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Jarrod RobelLv2

2 Aug 2018

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Related questions

What variable adjusts to make the quantity of money held equal to money supplied?

long-run demand

rate of inflation

value of money

equation of exchange

1. The government engages in more deficit spending. Ceteris paribus (all else equal), this would cause:

a. Both the demand and supply of loanable funds decrease.

b. The demand for loanable funds to increase.

c. Both the demand and supply of loanable funds to increase.

d. Economic institutions to collapse.

e. The supply of loanable funds to increase.

2. A technological advance leads to a shift in:

a. Neither short-run nor long-run aggregate supply.

b. Only short-run aggregate supply.

c. Both short-run and long-run aggregate supply.

d. Only aggregate demand.

e. Only long-run aggregate supply.

redgoat260

C. Assume that the long-run aggregate supply is given Y = (2K^1/2)*(L^1/2) , while the short-run aggregate supply curve is horizontal at P = $1.0. The aggregate demand curve is Y = 5*(M/P), and money supply is M = $1,000. Assuming that the economyï¿½s L = K = 2,500,

answer the following questions:

1. What is the income velocity, V?

2. If the economy is initially in long-run equilibrium, what are the values of P and Y?

3. Suppose the aggregate demand curve becomes Y = 3*(M/P).

a. What is the income velocity, V?

b. What are the short-run values of P and Y?

c. With the new aggregate demand function, once the economy adjusts to its long-run equilibrium, what are the values of P and Y?

d. Draw a diagram showing how economy moves from its initial long-run equilibrium (found in part 2), to the short-run equilibrium (found in part 3.b.), and then back to the long-run equilibrium (found in part 3.c)

4. Now, instead of changing the aggregate demand, assume that the Fed decreases money supply from M = $1,000 to M = $400.

a. What are the short-run values of P and Y?

b. With the new aggregate demand function, once the economy adjusts to its long-run equilibrium, what are the values of P and Y?

c. Draw a diagram showing how economy moves from its initial long-run equilibrium (found in part 2), to the short-run equilibrium (found in part 4.a.), and then back to the long-run equilibrium (found in part 4.b).