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ECON102 Lecture Notes - Money Supply

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School
University of Waterloo
Department
Economics
Course
ECON102
Professor
Angela Trimarchi

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ECON102 Full Course Notes
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ECON102 Full Course Notes
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Document Summary

We now turn to an analysis of the short-run effects of changes in the money supply on the interest rate. The money supply is determined by the bank of canada. The demand for money curve slopes down and to the right. An increase in the interest rate causes people to demand (and hold) less money for transactions purposes. Diagram 3: an increase in the level of transactions. Diagram 3: factors that cause the money demand curve to shift. An increase in the level of transactions, caused by either an increase in: In the price level (p) or the quantity of real output (y), causes the money demand curve to shift to the right from md. The demand for money depends: and: positively on the value of transactions, negatively on the interest rate, the opportunity cost of holding money. Diagram 4: equilibrium in the money market r*

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Related Questions

In the liquidity-preference framework, suppose that the Fed changes the money supply to keep the nominal interest rate unchanged whenever the demand for money shifts. Show what happens to the quantity of money and the nominal interest rate if the money-demand curve shifts to the right.

Suppose that the liquidity effect is small, people monitor changes in the money supply carefully, and prices and inflation expectations adjust rapidly. In this situation, describe the movement of the nominal interest rate when there is a permanent decline in the growth rate of the money supply.

The reason why the money supply curve is vertical is that

a. the real income does not influence the quantity of money supplied

b. the price level does not influence the level of spending

c. only the interest rate influences the quantity of money supplied

d. the Federal Reserve sets the money supply

If the Money Supply is less than Money Demand, what will the bank of Canada do in order to maintain their target interest rate? And if the Money Supply is greater than Money Demand?