Chris Saul
New member
1. Graph an economy in long run equilibrium.
a.) Now assume that banks may pay interest on checking accounts which makes holding money more attractive. How does this affect the demand for money? What happens to the velocity of money and why? Show this change on your graph. What happens to output and prices in the short run?
b.) If the Fed decides not to intervene, will this economy stay at your new equilibrium above? Why or why not? If the economy reaches a new equilibrium, where is this new equilibrium and why did the economy move to the point?
c.) No assume the Fed decides to stabilize output in the economy. What policy choice is appropriate, increasing or decreasing the money supply? Why? Graph this policy choice and locate your new equilibrium.
a.) Now assume that banks may pay interest on checking accounts which makes holding money more attractive. How does this affect the demand for money? What happens to the velocity of money and why? Show this change on your graph. What happens to output and prices in the short run?
b.) If the Fed decides not to intervene, will this economy stay at your new equilibrium above? Why or why not? If the economy reaches a new equilibrium, where is this new equilibrium and why did the economy move to the point?
c.) No assume the Fed decides to stabilize output in the economy. What policy choice is appropriate, increasing or decreasing the money supply? Why? Graph this policy choice and locate your new equilibrium.