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Chapter 15: Q1. (page 558)

There is an increase in the demand for money at every interest rate. Draw a diagram showing the effect of this on the equilibrium interest rate for a given money supply.

Short Answer

Expert verified

The diagram below shows an increase in money demand at each level of interest rate and its effect on the equilibrium level.

Step by step solution

01

Illustration through the diagram 

If the demand for money increases at every interest rate, there will be a shift in the demand curve.

The y-axis shows interest rates, and the x-axis shows the quantity demanded and supplied of money. The equilibrium rate of interest is R resulting from an interaction of demand curve MD and supply curve MS at point E1. With an increase in demand for money, the demand curve MD1will shift rightwards to MD2, given the supply curve. As a result, the interest rates will rise from R1 to R2, resulting in the equilibrium interest rates moving to E2.

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Most popular questions from this chapter

Explain how each of the following would affect the quantity of money demanded. Does the change cause a movement along the money demand curve or a shift of the money demand curve?

a. Short-term interest rates rise from 5% to 30%.

b. All prices fall by 10%.

c. New wireless technology automatically charges supermarket purchases to credit cards, eliminating the need to stop at the cash register.

d. In order to avoid paying a sharp increase in taxes, residents of Laguria shift their assets into overseas bank accounts. These accounts are harder for tax authorities to trace but also harder for their owners to tap and convert funds into cash.

In 2010, only around 25% of mobile phones in the United States were smartphones. In 2017, that number increased to more than 80%. How does this situation play into the PayPal story, and how does it fit into the broader pattern of monetary history?

Which of the following will increase the opportunity cost of holding cash or reduce it? Explain.

a. In order to attract new customers, the new internet payment firm, PayBuddy, announces it will pay0.5% interest on cash balances in a PayBuddy account.

b. To attract more deposits, banks raise the interest paid on six-month CDs.

c. In an effort to increase holiday sales, stores offer one-year zero-interest deals on purchases made with store credit cards.

In setting monetary policy, which central bank—one that operates according to a Taylor rule or one that operates by inflation targeting—is likely to respond more directly to a financial crisis? Explain.

Assume the central bank increases the quantity of money by 25%, even though the economy is initially in both short-run and long-run macroeconomic equilibrium. Describe the effects, in the short run and in the long run (giving numbers where possible), on the following.

a. Aggregate output

b. Aggregate price level

c. Interest rate
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