Already have an account? Get multiple benefits of using own account!
Login in your account..!
Remember me
Don't have an account? Create your account in less than a minutes,
Forgot password? how can I recover my password now!
Enter right registered email to receive password!
Let us now see a bit more closely how monetary policy works. See Figure
Figure
The initial equilibrium at point E is on the initial LM schedule that corresponds to a real money supply . Suppose now that the nominal quantity of money is increased, for example by open market operations. Given a constant price level, the real quantity of money increases as the nominal quantity of money increases. As a result of the increase in the real quantity of money, the LM schedule shifts to LM1.
For the new schedule LM1, the equilibrium will be at point E1 with a lower rate of interest and a higher level of income.
Let us see a bit more closely how with an expansion in real money supply the economy moves from the original equilibrium at E to the new equilibrium at E1. At the initial equilibrium point, E, the increase in money creates an excess supply of money. The public tries to adjust to the excess supply of money by buying financial assets. As a result of the increase in demand, the price of financial assets rises, and thus the yields decline. The adjustment process in the assets markets is much more rapid than that in the goods market and, therefore, we move immediately to point El when the money supply increases. At E1 the money market clears and the public is holding larger quantity of real money because the interest rate has declined sufficiently. At point E1, however, there is an excess demand for goods. The decline in the interest rate, given the initial income level Y0, raises aggregate demand and thus causes inventories to run down. In response, the output expands and we start moving up the LMl schedule. As output expands, the interest rate rises (after the immediate decline in interest rate when money supply is increased) because increase in output raises the demand for money and the increase in demand for money has to be checked by higher interest rates.
how can a country maintain equilibrium GDP with foreign trade?
Suppose the annual demand function for the Honda Accord is Qd = 430 - 10 PA + 10 PC - 10 PG where PA and PC are the prices of the Accord and the Toyota Camry respectively (in thous
Industrial Production and Agricultural Production Industrial production and agricultural production are aggregate measures of sectoral outputs. It is a common practice to divi
Discuss about the Keynesian economists The Keynesian economist A. W. Phillips developed short-run Phillips curve analysis in the 1950s. Phillips had researched the relationshi
Explain the term production function in the economics. Production Function A production function is the association between the quantity of inputs a firm utilizes and the qu
Estimate the cost of expanding a planned new clinic by 20,000ft^2. The appropriate capacity exponent is 0.66, and the budget estimate for 200,000ft^2 was $15 million.
Q. Money market with inflation and rising money supply? Figure: The money market with inflation and rising money supply If we let π M refer the growth rate in money
The events X and Y are mutually exclusive. Suppose P(X)=.05 and P(Y) =.02. What is the probability of either X or Y occurring? What is not probability of X nor Y happens?
The World Trade Organization is a successor organization to the A.United Nations. B.World Bank. C.International Court of Justice. D. GATT.
Derive saving- investment recognize in the context of an open economy. From national income accounting shows that an enhance in taxes (whereas transfer unchanged) must imply a
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!
whatsapp: +1-415-670-9521
Phone: +1-415-670-9521
Email: [email protected]
All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd