Using the long-run ISLM model, explain and demonstrate graphically the neutrality of money, for the case of an increase in the money supply
What will be an ideal response?
See figure below.
The increase in the money supply shifts LM to the right, increasing output to Y', above the natural rate Y*. The interest rate falls from i to i'. Excess demand increases the price level, reducing the real value of the money supply. The LM curve shifts back until the all pressure on prices is eliminated by the return to the natural rate of output. The initial and final levels of output and interest rate are the same. No real variables have changed.
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Suppose the Fed buys $1 billion worth of bonds and the required reserve ratio is 20%. In the theoretical limit, the money supply could
A) decrease by $1 billion. B) increase by $1 billion. C) increase by $5 billion. D) decrease by $5 billion.
The economy's Current Account measures primarily
a. sources and uses of current income b. income and outflow of payments for goods and services c. tax receipts and government spending d. changes in foreign exchange holdings e. none of the above
An increase in the rate of inflation in the U.S. will increase the supply of dollars and decrease other countries' demand for dollars
Indicate whether the statement is true or false
Table 36-1Suppose the economy of Macroland is described by the following:C = 200 + 0.8 DI (DI = disposable income)I = 300 + 0.2Y?50r (Y = GDP)(r, the interest rate, is measured in percentage points. For example, a 9 percent interest rate is r = 9).For this economy, assume that the Federal Reserve uses its monetary policy to peg the interest rate atr = 5G = 750T = 0.25YX = 200M = 150 + 0.2YHint: DI = Y?T From Table 36-1, compute equilibrium GDP for Macroland.
A. 3,000 B. 2,950 C. 2,625 D. 2,525