Using the money demand and money supply model, show and explain why the Federal Reserve cannot achieve a target for both the money supply and an interest rate
What will be an ideal response?
The Fed does not control money demand, so it cannot achieve a target for both the money supply and an interest rate. In the graph below, the Fed could achieve an interest rate of 4 percent or a money supply of $500 billion. It appears that since the money market is in equilibrium at point A with an interest rate of 4 percent and the money supply of $500 billion that the Fed can achieve both targets. If money demand shifts, however, the Fed must choose whether to maintain the interest rate target of 4 percent or the money supply target of $500 billion.
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If the Federal Reserve conducts open market purchases, the money supply ________, shifting the LM curve to the ________, everything else held constant
A) decreases; right B) decreases; left C) increases; right D) increases; left
A monopolistically competitive market
a. usually has too many firms, reducing the economic profit of each firm to zero. b. usually has too few firms, reducing the product variety for consumers. c. may have too many or too few firms, and the government can intervene to achieve the optimal number of firms. d. may have too many or too few firms, but the government can do little to rectify the situation.
Business cycle peaks are always followed by the _____ phase.
Fill in the blank(s) with the appropriate word(s).
Suppose a perfectly competitive firm is currently selling 200 units at $5 per unit and has a marginal cost of $6. The firm can maximize profit by
a. decreasing output b. increasing price c. decreasing price d. increasing output