Home » 1. ates at the end of March. a. What is happening in the market for money when the Fed pursues the monetary policy above?

# 1. ates at the end of March. a. What is happening in the market for money when the Fed pursues the monetary policy above?

1.      ates at the end of March.

a.      What is happening in the market for money when the Fed pursues the monetary policy above? Use the simple model of the supply and demand for money to show what is happening. Remember:

i.     Clearly state the policy change.

ii.     Clearly draw and label a graph that shows the change.

iii.     Clearly state what happens to the equilibrium interest rate and the quantity of money.

b.      What happens in the market for money after the Fed changes interest rates?

i.     Clearly state what is happening in the economy after the Fed pursues the policy in question 1a and why that affects the market for money.

ii.     Clearly draw and label a graph that shows the change.

iii.     Clearly state what happens to the equilibrium interest rate and the quantity of money.

c.      How does this change (in question 1b) play out over time? Does it happen immediately or over time? What does this mean for the policy change the Fed is trying to pursue in question 1a? Does the policy have an effect in the short run? How about in the long run?

d.      Now turn to bond markets and explain how the CBF’s policy change will affect the equilibrium price and quantity of bonds.

i.     Clearly state WHY the Fed’s policy will have an effect on bond markets.

ii.     Clearly draw and label graphs that shows this change.

iii.     Clearly state what happens to the equilibrium price and interest rate in bond markets.

e.      How does this change (in question 1d) play out over time? Does it happen immediately or over time? What does this mean for the policy change the Fed is trying to pursue in question 1d? Does the policy have an effect in the short run? How about in the long run?

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