Answer to Question #89521 in Macroeconomics for anamika

Question

The rate of interest is a price:a. Of what is it the price? (1 mark)b. What determines this price? (Sketch a relevant graph of the money market).(2 marks)c.What factors influence the demand for money? (2 marks)d. What factors influence the supply ofmoney?(2 marks)e. If the money market is in short-run equilibrium, explain the adjustments that will take place for: i)an increase the in money supply(2 marks)ii)increase in the demand for money

Answer 1

a. Rate of interest is a price of money.

b. Money demand and supply determine this price.

c. Factors that influence the demand for money are: interest rates, consumer spending, precautionary motives, transaction costs for stocks and bonds, change in the general level of prices, international factors.

d. Factors that influence the supply of money are:

open market operations, change in reserve requirement, public's demand for cash.

e. If the money market is in short-run equilibrium, then:

i) an increase in the money supply will increase the equilibrium quantity of money and decrease the equilibrium interest rate.

ii) increase in the demand for money will increase both the equilibrium quantity of money and the equilibrium interest rate.