Explain money market and price changes, Macroeconomics

Assignment Help:

Q. Explain money market and price changes?

The money market and price changes

The money demand curve will shift to the right (left) in themoney market diagram if P increases (decreases).

Money supply is an exogenous variable controlled by central bank so there is no automatic mechanism that will change MS when P changes. Remember that money market figure demonstrates the supply and demand for money as functions of R everything else held fixed. Hence we can still use the money market figure in AS-AD model as long as we keep P fixed. 

We should now determine how to analyze changes in P in the money market. To do this, keep P constant at two different levels P1 = 10 and P2 = 20. We know that MDrely positively on P and MD(Y, R, P2) > MD(Y, R, P1). Demand for money increases when P increases if Y and R don't change.

406_Explain money market and price changes.png

Figure: Money market diagram with different prices

If P increases, demand for money will increase for all interest rates. This means that demand curve should be shifted outwards to right when P increases. Note that with a fixed Y and a fixed money supply, if P increases, R should increase for the money market to remain in equilibrium.


Related Discussions:- Explain money market and price changes

Bank of canada announces that it will raise the money supply, Suppose the B...

Suppose the Bank of Canada announces that it will raise the money supply in the future but does not change the money supply today. Using the Fisher equation, explain what happens t

Lilie, What are the requirements for something to be considered money? Why ...

What are the requirements for something to be considered money? Why does the dollar have value?

Elucidate the rise in gdp, How much does GDP rise in each of the following ...

How much does GDP rise in each of the following scenarios: 1. During a recession, the government raises unemploymemnt benefits by $100 million. 2. A new US airline purchases

Inflation, What are the effects of neutral inflation

What are the effects of neutral inflation

Balance between automation and labor, Businesses often decide between using...

Businesses often decide between using automation and labor in production. An automotive environment may have high fixed costs and low variable costs, and an industry that utilizes

Monopoly model, Use the monopoly model to explain how providers are able to...

Use the monopoly model to explain how providers are able to charge different groups of patients different prices.

Abnormal profits, explain the terms abnormal profits and normal profits

explain the terms abnormal profits and normal profits

Trade cycle, policy measures to control trade cycle

policy measures to control trade cycle

Assignment, derive equations for IS,LM and AD curves.

derive equations for IS,LM and AD curves.

Actively-managed mutual funds, A sample of 60 mutual funds was taken and th...

A sample of 60 mutual funds was taken and the mean return in the sample was 13% with a standard deviation of 6.9%. The return on a particular index of stocks (against which the mut

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd