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When the interest rates are high, people would prefer to save than holding money. That means money supply in the economy is decreased. Whereas when the interest rates are low people prefer to hold money and spend, means increased money supply in the economy.
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Why is money suppy a major determinant of interest rates?
Because: Real interest rate occurs when real money demand = money supply When money supply changes, the equilibrium interest rates changes as this equation shows.
Why is money supply curve vertical?
The money supply curve is assumed to be vertical by many textbooks based on the belief that the supply of money is unaffected by the changes in interest rates.
A change is the money supply will change investment when?
Monetary policy will never be effective if interest rates: not respond to a change in the money supply, and investment spending does not respond to changes in the interest rate.
To reduce the level of inflation monetarists advocate a a sharp increase in short term interest rates b steady and predictable changes in the money supply c a decrease in govt spending?
The Answer is B) Steady and predictable changes in the money supply.
If the fed increases the money supply what will happen to interest rates?
when money supply is increased, interest rates decrease
Why is money suppy a major determinant of interest rates?
Because: Real interest rate occurs when real money demand = money supply When money supply changes, the equilibrium interest rates changes as this equation shows.
Why the government attempt to target changes in the money supply or changes in interest rate but not both?
answer
How do changes in interest rates affect money supply?
When the interest rates are high, people would prefer to save than holding money. That means money supply in the economy is decreased. Whereas when the interest rates are low people prefer to hold money and spend, means increased money supply in the economy.
Why is money supply curve vertical?
The money supply curve is assumed to be vertical by many textbooks based on the belief that the supply of money is unaffected by the changes in interest rates.
A change is the money supply will change investment when?
Monetary policy will never be effective if interest rates: not respond to a change in the money supply, and investment spending does not respond to changes in the interest rate.
To reduce the level of inflation monetarists advocate a a sharp increase in short term interest rates b steady and predictable changes in the money supply c a decrease in govt spending?
The Answer is B) Steady and predictable changes in the money supply.
If the fed increases the money supply what will happen to interest rates?
when money supply is increased, interest rates decrease
How does a expansionary monetary policy affect the interest rate overall price level and GDP?
expansionary monetary policy increases money supply by lowering interest rates
What effect does an increase in the money supply have on inflation?
An increase in the money supply shifts the money supply curve to the right. If you look on your graph, you will see that an increase in money supply will cause the interest rate to decrease. Here's why: Fed increases money supply-->excess supply of money at the current interest rate -->people buy bonds to get rid of their excess money-->increase in the prices of bonds --> decrease in the interest rate.
What is the main idea in monetarism?
Monetarists believe that changes in the money supply affect the level of production in a country in the short-run but only affect the price-level in the long run. One key outcome of monetarist thought is about the optimal level of interest rates and thus real money supply: social welfare is maximised when interest rates are equal to 0 and at the level of real money supply which provides this rate. In general, this means two things: 1) that inflation is the result of money supply changes; 2) that inflation has welfare losses due to reallocation of assets. Monetarists believe the government purposely uses the money supply to create inflation to provide some level of revenue for itself, since inflation created by printing money is known as an 'inflation tax' and provides the government with money whose cost is borne by the public. Monetarists believe that the government should not interfere in monetary policy and that they should keep the money supply constant such that the interest remains 0 in the long-run, thus minimising welfare loss.
Which factors affect rate of interest?
Fist and fore most is NEED. Then the inflation. Third availability of money in the market i If the returns are less on the already made investments the availability of money will be less in the market. There by increase in the interest rates. Also changes in the economic condition will affect the interest rates.
How does raising the discount rate affect the money supply?
Decreases the money supply
