Download Demand for Money

Demand
for
Money
Draw a graph that represents the
relationship between the quantity of
money demanded and the interest
rate.
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On the same graph
show an increase in the interest rate
from r1 to r2
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On the same graph
Show the result of aggregate real
income decreasing
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On the same graph
Show the result of an increase in the
aggregate price level.
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START OVER
Draw a graph that represents BOTH
the demand and supply of money.
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On the same graph
Show what happens when the
FOMC engages in an open market
purchase of Treasure bills.
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• What happened to the equilibrium
quantity of money? Increase
• What happened to the equilibrium
interest rate? .Decrease
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On the same graph
Show what happens when the
FOMC engages in an open market
sale of Treasure Bills.
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• What happened to the equilibrium
quantity of money? Decrease
• What happened to the equilibrium
interest rate? Increase
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On the same graph
Show when happens when
aggregate price level increases
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• What happened to the equilibrium
quantity of money? Nothing
• What happened to equilibrium
interest rate? Increase
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START OVER
The economy of Narvaizville is in long run
equilibrium. Draw an AS/AD graph
representing this situation. Be sure to include
SRAS, LRAS and AD.
DO NOT draw demand for money graph!
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Set this graph aside we will be using it
again
START OVER
The FOMC of Narvaizville decides to reduce
interest rates through an open market operation.
• Draw a graph of the money market showing the
initial situation and then the effect of the
FOMC’s monetary policy actions.
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Go back to this graph
Show what affect the FOMC’s
monetary policy will have on the
aggregate economy.
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Show what affect of the FOMC’s
monetary policy actions will have on
the aggregate economy
Mark the new equilibrium point
• What economic problem exists now? inflation
• When there is inflation how will workers respond?
Ask for a raise
On the same graph
Since salaries are an input cost, show what effect this
increase in input costs (aka salaries) will have on the
graph below
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Since salaries are the cost of an input, show what
effect this increase in input costs (aka salaries) will
have on the graph below
Mark the new equilibrium point
People choose to hold money because
a. It has little or no opportunity cost
since money does not earn
interest
b. It facilitates making transactions.
c. It yields a lower rate of return
than nonmonetary assets
d. Answers b and c are correct
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People choose to hold money because
a. It has little or no opportunity cost
since money does not earn
interest
b. It facilitates making transactions.
c. It yields a lower rate of return
than nonmonetary assets
d. Answers b and c are correct