Explain money market and price changes, Macroeconomics

Assignment Help:

Q. Explain money market and price changes?

The money market and price changes

The money demand curve will shift to the right (left) in themoney market diagram if P increases (decreases).

Money supply is an exogenous variable controlled by central bank so there is no automatic mechanism that will change MS when P changes. Remember that money market figure demonstrates the supply and demand for money as functions of R everything else held fixed. Hence we can still use the money market figure in AS-AD model as long as we keep P fixed. 

We should now determine how to analyze changes in P in the money market. To do this, keep P constant at two different levels P1 = 10 and P2 = 20. We know that MDrely positively on P and MD(Y, R, P2) > MD(Y, R, P1). Demand for money increases when P increases if Y and R don't change.

406_Explain money market and price changes.png

Figure: Money market diagram with different prices

If P increases, demand for money will increase for all interest rates. This means that demand curve should be shifted outwards to right when P increases. Note that with a fixed Y and a fixed money supply, if P increases, R should increase for the money market to remain in equilibrium.


Related Discussions:- Explain money market and price changes

Towards a national accounting system, TOWARDS A NATIONAL ACCOUNTING SYSTEM ...

TOWARDS A NATIONAL ACCOUNTING SYSTEM  A real life modern economy is a very complex structure consisting of millions of units engaged in a variety of economic transactions. Ther

Every month price of the telecommunication services, You are an assistant t...

You are an assistant to a senator who chairs an ad hoc committee on reforming taxes on telecommunication services. Based on your research, AT&T has spent over $15 million on relate

Threaten the formal right to give blood, Singer suggests that although the ...

Singer suggests that although the right to sell blood does not threaten the formal right to give blood, it is incompatible with "the right to give blood, which cannot be bought, wh

Influence the risk accompanying long-term contracts, What impact will high ...

What impact will high and variable rates of inflation have on the economy? How will they influence the risk accompanying long-term contracts and related business decisions?

Why economists use real gdp rather than nominal gdp, Explain why we cannot ...

Explain why we cannot measure the national product simply by adding up the production of all firms. Why do the economists use real GDP rather than nominal GDP to gauge economic

MARKET, COMPARE AND CONTRAST KEYNESIAN THEORY AND CLASSICAL MODEL

COMPARE AND CONTRAST KEYNESIAN THEORY AND CLASSICAL MODEL

The monetary policy of the U.S., I am writing a research paper for my macro...

I am writing a research paper for my macroeconomics class and I am having trouble with it. I am writing on the topic of the monetary policy and i can''t seem to understand a few th

The income tax rate is reduced, If income falls below its potential and the...

If income falls below its potential and the income tax rate is reduced, this will: A. raise the passive deficit but reduce the structural deficit. B. raise both the passive and str

Real output, SUppose nominal GDP increases from 5.8 trillion to 6 trillion....

SUppose nominal GDP increases from 5.8 trillion to 6 trillion. The GDP deflator rose over that same year by 3.9 percent. By what percent does the real output increase?

Simple regression analysis uncover the ceteris paribus, Let kids denote the...

Let kids denote the number of children ever born to a woman, and let educ denote years of education for the woman. A simple model relating fertility to years of education is kids =

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd