Question #210408
Explain how each of the following developments would affect the supply of money, the demand
for money, and the interest rate. Illustrate your answers with diagrams.
Expert's answer
The purchase of bonds in an open-market operations by the Federals bond traders shifts the money supply curve from MS_{0}
to MS_{1}
1
since there is an increase in the supply of money available in the economy. This increase then causes the equilibrium interest rate to shift downward from r_{0}
to r_{1}
1
.
The increase in credits card availability shifts the money demand curve from MD_{0}
to MD_{1}
1
since people would prefer to use the card instead of bringing cash. This decrease then causes the equilibrium interest rate to shift downward from r_{0}
to r_{1}
1
.
The wave of optimism boosts business investment and expands aggregate demand would cause the money demand curve shift to from MD_{0}
to MD_{1}
1
since people would need more money to buy investment. This increase then causes the equilibrium interest rate curve to shift upward from r_{0}
to r_{1}
1
.
