The higher the interest rate, the smaller the amount of money demanded as an asset.
On a graph measuring the interest rate vertically and the amount of money demanded horizontally, the two demands for the money curves can be summed horizontally to get the total demand for money. This total demand shows the total amount of money demanded at each interest rate. The equilibrium interest rate is determined at the intersection of the total demand for money curve and the supply of money curve.
a) Expanded use of credit cards: transaction demand for money declines; total demand for money declines; interest rate falls. (b) Shortening of worker pay periods: transaction demand for money declines; total demand for money declines; interest rate falls. (c) Increase in nominal GDP: transaction demand for money increases; total demand for money increases; interest rate rises.
(a) The equilibrium interest rate is 4% where the quantity of money supplied is equal to the total quantity demanded.
(b) At the equilibrium interest rate the quantity of money supplied is 200 and the asset demand for money is 50, the transactions demand for money is 150 and the total quantity of money demanded is 200.
9.) Bond Price ($) Interest Rate (%)
Bond price and interest rate are inversely related.
Assuming there is no initial change in GDP, there will be no change in the transactions demand for money. Therefore, the entire increase in the money supply will initially go toward the purchase of financial assets that people prefer to the holding of noninterest-bearing cash. Assuming that these purchases are entirely for bonds (some undoubtedly will be, anyway), the increased demand for bonds will drive their price up and the rate of return on them down; that is, the interest rate in the market will drop.
The lower interest rate wi View More »