Question

2. Equilibrium and disequilibrium in the money market

The following diagram represents the money market in the United States, which is currently in equilibrium, as indicated by the grey star.
Suppose the Federal Reserve (thelFed) chooses not to alter the money supply between 2013 and 2014. On the following graph, use the grey point (star symbol) to indicate the equilibrium interest rate and quantity of money that would result from this lack of intervention. Suppose the Fed wants to keep 2014 interest rates at their 2013 level. On the previous graph, place the green line (triangle symbols) to indicate the new money supply curve if the Fed follows this policy. Then use the black point (plus symbol) to indicate the equilibrium interest rate and quantity of money in this case. Because _______, most central banks set monetary policy aimed at targeting a specific.
Answers in the bank:
1st blank: Increasing, Decreasing
2nd: Money Supply, Money Demand
3rd: Less, More
4th: Decreases, Increases
5th:Must raise the interest they pay to, can issue bonds at lower interest rates and still

Answer 1

The Federal Reserve's decision to maintain or change the money supply directly affects the equilibrium in the money market. If the Fed chooses to keep interest rates steady, they might adjust the money supply to respond to changing money demand. This is in line with the Fed's monetary policy aimed at targeting specific interest rates for broader economic goals.

Step-by-step explanation:

Equilibrium and disequilibrium in the money market are impacted by the Federal Reserve's (the Fed) decisions on the money supply. If the Fed does not alter the money supply between 2013 and 2014, the equilibrium interest rate and quantity of money would potentially remain the same, marked by the grey star on the graph. However, if the Fed wishes to maintain 2014 interest rates at their 2013 level in response to an increase in money demand or other market changes, it would need to adjust the money supply curve. According to typical Fed's monetary policy practice, to keep rates steady, the Fed might inject more money into the economy, which would shift the supply curve to the right. More available funds typically result in decreased interest rates as lenders compete for borrowers. Central banks tend to set monetary policy targeting specific interest rates to influence broader economic conditions such as inflation, unemployment, and economic growth.

Answer 2

In the money market, if the Federal Reserve wants to maintain the interest rates from the previous year without changing other conditions, the equilibrium rate and money quantity remain the same. However, to keep interest rates steady despite increasing demands, the Fed would increase the money supply. This policy allows for lower government borrowing costs and stimulates lending activity.

Step-by-step explanation:

The question addresses the concept of equilibrium and disequilibrium in the money market, particularly in relation to the actions of the Federal Reserve's monetary policy. If the Fed chooses not to alter the money supply between 2013 and 2014, and demand for money remains constant, the equilibrium interest rate and quantity of money would not change from 2013. The existing equilibrium is represented by a grey star on the hypothetical money market graph.

However, if the Fed wishes to maintain the same interest rate levels from 2013 to 2014 amidst increasing money demand or other economic changes, they would need to increase the money supply to shift the supply curve rightward, indicated by a green line with triangle symbols on the graph. This would allow the interest rate to remain steady while accommodating the higher demand for money, which would increase the quantity of money in the equilibrium state, represented by a black point with plus symbol on the graph.

Most central banks, including the Federal Reserve, set monetary policies targeting specific economic outcomes such as stable inflation and low unemployment rates. This often involves manipulating the money supply to control interest rates. When central banks want to decrease interest rates, they will increase the money supply, making it cheaper for banks to borrow funds and leading to more loans being made. With lower interest rates, the government can issue bonds at lower interest rates and still attract buyers, whereas with high interest rates, the government must raise the interest it pays to attract buyers.