Question

An economy begins in long-run equilibrium, and then a change in goverment regulations allows banjs to start paying interest on checking accounts. recall that the money stock is the sum of currency and demand deposits, including checking accounts, so this regulatory change makes holding money more attractive.

a-How does this change affect the demand for money?

b-What happens to the velocity of money?

c-If the Fed keeps the money supply constant, what will happend to the output and prices in the short run and in the long run?

d-If the goal of the Fed is to stabilize the price level, should the Fed keep the money supply constant in response to this regulatory change?if not, what should it do? Why?

e-If the goal of the Fed is to stabilize output, how would your answer to part(d) change?

Answer 1

All the points stem from a regulatory change in the market that changes the holding power of money.

Step-by-step explanation:

a. The change affects the demand for money in the way that more in the economy people will be willing to hold money to themselves increasing the demand.

b. velocity of money will stagnate as people will begin to hoard it and not circulate it.

c. If the Fed keeps the supply constant, due to the high demand the output will be less and the demand will be high, however in the long term the curve will flatten out with marginally higher prices as the hoarding would stop.

d. Yes, the fed should make the supply constant to flatten out the curve as said in c.

e. The stabilization of output would require more cash flow to make the flow of money as constant as it was before.