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Using the aggregate money demand theoretical framework, discuss 3 factors that determine Australia’s aggregate money demand.
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- 2. What “backs" the money supply in the United States? What determines the value (domestic purchasing power) of money? How does the purchasing power of money relate to the price level? Who in the United States is responsible for maintaining money's purchasing power? There is ( no, some ) concrete backing to the money supply in the United States. Paper money, which has ( some, no ) intrinsic value, has value only because people are willing to accept it in exchange for goods and services, including their labor services as employees. And people are willing to accept paper as money because they know that everyone else is also willing to do so. If the monetary authorities were issuing new banknotes at a rate far in excess of available output, the acceptability of paper money would (increase, diminish ). People would start to worry about whether the banknotes would be worth much after they received them. Checks are part of the money supply and ( are, are not) legal tender, but people accept…2. Equilibrium and disequilibrium in the money market The following diagram represents the money market in the United States, which is currently in equilibrium, as indicated by the grey star. INTEREST RATE (Percent) 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 0.6 Money Demand 0.7 Money Supply 0.8 0.9 1.0 1.1 1.2 QUANTITY OF MONEY (Trillions of dollars) 1.3 New Curve New Equilibrium Suppose the Federal Reserve (the Fed) announces that it is lowering its target interest rate by 25 basis points, or 0.25%. It would achieve this by the . Use the green line (triangle symbols) on the preceding graph to illustrate the effects of this policy. Place the black point (plus symbol) on the graph to indicate the new equilibrium interest rate and quantity of money. The sequence of events that results in a new equilibrium interest rate, after the Fed makes the change you selected, may be described as follows: Because there is money in the financial system, the quantity of , which means that bond issuers…4. Changes in the money supply
- 60) Use the money demand and money supply model to show the money market in equilibrium with an interest rate of 5 percent and the quantity of money of $800 billion. Suppose the Federal Reserve increases the money supply to $850 billion. At the previous equilibrium interest rate of 5 percent, will households and firms now be holding more money or less money than they want to hold, and will they be buying or selling short-term financial assets? At the new equilibrium interest rate, households and firms will desire to hold the entire $850 billion of the money supply. What causes households and firms to want to hold the additional $50 billion of the money supply? 61) Use the money demand and money supply model to show graphically and briefly explain the effect on the interest rate if real GDP increases. 112 Assume that the Saudi economy is in a recession and SAMA decides to implement an expansionary monetary policy. Use appropriately labeled graphs to trace the impact of an expansionary monetary policy on the: the money market, market for loanable funds aggregate goods market3. Draw and correctly label a graph of the money market. On your graph demonstrate each of the following: (a) Identify the equilibrium interest rate. (b) Explain if the rate you identified in part (a) is a nominal or real rate. (e) On your graph demonstrate the effect of federal government engaging in a budget deficit reduction plan. (d) On your graph demonstrate the effect of the Federal Reserve engaging in a contractionary monetary policy.
- 16 A change in-----------leads to a change in-----------as well. a) the money supply indirectly; investment b) the interest rate; government purchases c) the money supply; government purchases d) consumption expenditures; the money supply7. As the number of transactions in the economy decreases: the supply of money increases. the supply of money decreases. the demand for money increases. the demand for money decreases) Monetary policy and financial stability The Treasury has been paying close attention to the policy actions taken by Australia’s central bank, the Reserve Bank of Australia (RBA), which also plays an important role in managing the Australian economy. For your Policy Brief, you have been asked to write some background information on the role of monetary policy in managing the economy. Explain the difference between expansionary monetary policy and contractionary monetary policy? As part of your explanation, identify the conditions in which a central bank would implement expansionary monetary policy and the conditions in which it would implement contractionary monetary policy. In your answer, refer to the macroeconomic objectives that the RBA is responsible for in its charter. (3-4 sentences)
- (c) Explain how the GDP and the interest rate are related to the transactions and asset demands for money.13. (Question 6 on p.347) Explain the links between changes in the nation's money supply, the interest rate, investment spending, aggregate demand, and real GDP (and the price level). A change in the nation's money supply (achieved by changing reserves in the banking system) will cause an opposite change in the interest rate. A reduction in the money supply will make funds increasingly ( scarce, abundant ) and drive (up, down) their price (interest rate). The interest rate and investment spending are also ( directly, inversely) related. A rising interest rate will make some investments (capital spending projects) unprofitable, so spending on those will (increase, decline ). Investment spending is part of aggregate demand, so they will move together, as will real GDP. A decline in spending (AD) will (increase, reduce ) inflationary pressure (and will ( increase, reduce ) prices if they are downwardly flexible).Why do the supply of money and the volume of bank loans both increase or decrease at the same time? Context: The supply of money and the volume of bark loans both increase or decrease at the same. Time because issuing new bank loans to the money supply, while calling in existing bank loans reduces the money supply.