Question

following the price level decrease, the quantity of money demanded at the initial interest rate of 6% will be than the quantity of money supplied by the fed at this interest rate. as a result, individuals will attempt to their money holdings. in order to do so, they will bonds and other interest-bearing assets, and bond issuers will realize that they interest rates until equilibrium is restored in the money market at an interest rate of

Answer 1

After a decrease in the price level, there will be a higher quantity of money demanded than supplied, leading individuals to sell bonds, which pushes down the interest rate until market equilibrium is restored. Expansionary monetary policy actions, such as bond purchasing by the central bank, decrease interest rates and stimulate the economy, whereas contractionary actions have the reverse effect.

Step-by-step explanation:

Following a decrease in the price level, the quantity of money demanded at the initial interest rate of 6% will be higher than the quantity of money supplied by the Fed at this interest rate. Individuals will therefore attempt to increase their money holdings. In order to do so, they will sell bonds and other interest-bearing assets. As more bonds are sold, bond issuers will realize that they must lower interest rates until equilibrium is restored in the money market at a new, lower interest rate.

When a central bank enacts an expansionary monetary policy, it will be purchasing bonds, which increases the money supply, shifting the demand curve for bonds, raising bond prices, and effectively lowering the interest rate. This lower interest rate then encourages investment and can affect the exchange rate in such a way that it stimulates net exports, shifting the aggregate demand curve to the right. Conversely, a contractionary monetary policy will have the opposite effect, selling bonds, reducing the money supply, raising interest rates, and ultimately pushing aggregate demand to the left.

Answer 2

The rate of change of the price level as a result of the increase in the money supply caused by the Fed's purchase of bonds will be 5%

How to explain

The Federal Reserve buying bonds increases the money supply, boosting overall demand. This rise in demand influences prices, with the speed of price changes linked to money supply growth and money circulation speed.

Let's assume that the Fed purchases $100 billion worth of bonds. This will increase the money supply by $100 billion.

Let's also assume that the velocity of money is 5. This means that each dollar in the money supply is used to purchase $5 worth of goods and services.

As a result of the increase in the money supply, the aggregate demand will increase by $500 billion ($100 billion * 5).

This increase in aggregate demand will lead to an increase in the price level of 5%.

Therefore, the rate of change of the price level as a result of the increase in the money supply caused by the Fed's purchase of bonds will be 5%.

The Complete Question

Following a price level decrease, the quantity of money demanded at the initial interest rate of 6% will be less than the quantity of money supplied by the Fed at this interest rate. As a result, individuals will attempt to reduce their money holdings. In order to do so, they will sell bonds and other interest-bearing assets. As a result, bond issuers will realize that they can lower interest rates until equilibrium is restored in the money market at an interest rate of 4%.

At what rate will the price level change as a result of the increase in the money supply caused by the Fed's purchase of bonds?