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?
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?
