Question

In each of the following cases graph the effect in the money market, including the change to equilibrium interest rates.

a. The Fed increases the Discount Rate

b. The Fed increases the Reserve Requirement Ratio

c. Household wealth decreases

d. The Fed buys bonds

e. The exchange rate value of the domestic currency increases

f. The government increases spending

Answer 1

Changes in the money market include impacts on the equilibrium interest rate due to the Fed's modifications of the discount rate and reserve requirements, household wealth variations, government spending, exchange rates, and Fed bond transactions.

Step-by-step explanation:

The money market is where participants borrow, lend, or trade in short-term loans. It is closely affected by the Federal Reserve's monetary policy. Below, we will graph the changes in the money market taking into account the different scenarios provided.

1. 
   
3. The Fed increases the Discount Rate: This action makes it more expensive for banks to borrow from the Fed. Therefore, there is a contraction in the money supply, which shifts the money supply curve to the left. This increase in the discount rate leads to a higher equilibrium interest rate in the money market.
4. 
   
6. The Fed increases the Reserve Requirement Ratio: Banks must hold more money in reserve, reducing the amount available for loans. The supply curve for money shifts left, leading to a higher equilibrium interest rate.
7. 
   
9. Household wealth decreases: This may lead to less consumer spending and less need for borrowing, thus the demand for money may decrease. The demand curve shifts left, resulting in a lower equilibrium interest rate.
10. 
    
12. The Fed buys bonds: This is an expansionary monetary policy. As the Fed purchases bonds, it increases the money supply, which shifts the money supply curve to the right, lowering the equilibrium interest rate.
13. 
    
15. The exchange rate value of the domestic currency increases: This makes it more expensive for foreigners to acquire the domestic currency, likely decreasing investment from abroad. Reduced demand for money shifts the demand curve left and lowers the interest rate.
16. 
    
18. The government increases spending: If financed by borrowing, the government increases the demand for loanable funds. The demand curve shifts right, increasing the equilibrium interest rate.

Overall, each scenario impacts the supply or demand for money, which consequently affects the equilibrium interest rate in the money market.