Demand for Money

Draw a graph that represents the relationship between the quantity of money demanded and the interest rate. 21 22 20 18 17 23 19 24 29 30 28 27 25 26 16 14 4 5 3 2 End 1 6 7 12 13 11 10 8 9 15

show an increase in the interest rate from r1 to r2 On the same graph show an increase in the interest rate from r1 to r2 21 22 20 18 17 23 19 24 29 30 28 27 25 26 16 14 4 5 3 2 End 1 6 7 12 13 11 10 8 9 15

Show the result of aggregate real income decreasing On the same graph Show the result of aggregate real income decreasing 21 22 20 18 17 23 19 24 29 30 28 27 25 26 16 14 4 5 3 2 End 1 6 7 12 13 11 10 8 9 15

Show the result of an increase in the aggregate price level. On the same graph Show the result of an increase in the aggregate price level. 21 22 20 18 17 23 19 24 29 30 28 27 25 26 16 15 4 5 3 2 End 1 6 7 12 13 11 10 8 9 14

START OVER Draw a graph that represents BOTH the demand and supply of money. 21 22 20 18 17 23 19 24 29 30 28 27 25 26 16 14 4 5 3 2 End 1 6 7 12 13 11 10 8 9 15

On the same graph Show what happens when the FOMC engages in an open market purchase of Treasure bills. 21 22 20 18 17 23 19 24 29 30 28 27 25 26 16 14 4 5 3 2 End 1 6 7 12 13 11 10 8 9 15

What happened to the equilibrium quantity of money? What happened to the equilibrium interest rate? . Increase Decrease 21 22 20 18 17 23 19 25 29 30 28 27 16 26 24 13 4 5 3 2 End 1 6 7 12 14 11 10 8 9 15

On the same graph Show what happens when the FOMC engages in an open market sale of Treasure Bills. 21 22 20 18 17 23 19 24 29 30 28 27 25 26 16 14 4 5 3 2 End 1 6 7 12 13 11 10 8 9 15

What happened to the equilibrium quantity of money? What happened to the equilibrium interest rate? Decrease Increase 21 22 20 18 17 23 19 25 29 30 28 27 16 26 24 13 4 5 3 2 End 1 6 7 12 14 11 10 8 9 15

Show when happens when aggregate price level increases On the same graph Show when happens when aggregate price level increases 21 22 20 18 17 23 19 24 29 30 28 27 25 26 16 14 4 5 3 2 End 1 6 7 12 13 11 10 8 9 15

What happened to the equilibrium quantity of money? What happened to equilibrium interest rate? Nothing Increase 21 22 20 18 17 23 19 25 29 30 28 27 16 26 24 13 4 5 3 2 End 1 6 7 12 14 11 10 8 9 15

DO NOT draw demand for money graph! START OVER The economy of Narvaizville is in long run equilibrium. Draw an AS/AD graph representing this situation. Be sure to include SRAS, LRAS and AD. DO NOT draw demand for money graph! 21 22 20 18 17 23 19 24 29 30 28 27 25 26 16 15 4 5 3 2 End 1 6 7 12 13 11 10 8 9 14

Set this graph aside we will be using it again

START OVER The FOMC of Narvaizville decides to reduce interest rates through an open market operation. Draw a graph of the money market showing the initial situation and then the effect of the FOMC’s monetary policy actions. 21 22 20 18 17 23 19 25 29 30 28 27 16 26 24 15 5 6 4 3 1 2 7 8 13 14 12 11 9 10 End

Go back to this graph Show what affect the FOMC’s monetary policy will have on the aggregate economy. 21 20 22 18 17 23 19 24 29 30 28 27 25 26 16 14 4 5 3 2 End 1 6 7 12 13 11 10 8 9 15

Show what affect of the FOMC’s monetary policy actions will have on the aggregate economy

Ask for a raise Mark the new equilibrium point What economic problem exists now? When there is inflation how will workers respond? inflation Ask for a raise

On the same graph Since salaries are an input cost, show what effect this increase in input costs (aka salaries) will have on the graph below 21 22 20 18 17 23 19 24 29 30 28 27 25 26 16 14 4 5 3 2 End 1 6 7 12 13 11 10 8 9 15

Since salaries are the cost of an input, show what effect this increase in input costs (aka salaries) will have on the graph below Mark the new equilibrium point

People choose to hold money because a. It has little or no opportunity cost since money does not earn interest b. It facilitates making transactions. c. It yields a lower rate of return than nonmonetary assets d. Answers b and c are correct 21 22 20 18 17 23 19 24 29 30 28 27 25 26 16 14 4 5 3 2 End 1 6 7 12 13 11 10 8 9 15

People choose to hold money because a. It has little or no opportunity cost since money does not earn interest b. It facilitates making transactions. c. It yields a lower rate of return than nonmonetary assets d. Answers b and c are correct