c The file named Four Markets shows all your favorite macroe

c. The file named Four Markets shows all your favorite macroeconomic markets in one place: The labor market, loanable funds market, money market, and the goods market. All four markets are currently in equilibrium. The Fed increases the supply of money by 50%. In the long run, the nominal interest rate will equal percent ___ and the real interest rate ___ percent.

d.The file named Four Markets shows all your favorite macroeconomic markets in one place: The labor market, loanable funds market, money market, and the goods market. All four markets are currently in equilibrium. The Fed increases the supply of money by 50%. Assume that as a result of this expansionary monetary policy, the aggregate demand also increases by 50%. Then, in the long run, the price level increases to ___ units.

Page Labor Markct 10 230 400 Labor (L) Loanable Funds Market 10 20 340 50 0 Loanable Funds (LF

Solution

C. The Fed increases the Supply of money by 50% thus equilibrium will shift from 40 to 60 (=1.5×40). Due to this the equilibrium point will shift to 60(Refer Money Market graph).

(Supply curve shifts to its right due to increase in money supply)

Nominal interest rate 3%

Real interest rate = Nominal interest rate - Inflation rate

Real interest rate = 3 - 2 = 1%

D. Supply of money has been increased by 50% thus the supply curve will shift to its right by 50%. That is the amount of money will shift from 40 to 60(=1.5×40).

Due to inflow of money into the economy that is expansionary fiscal policy the aggregate demand shift from 40 to 60(=1.5×40).

That is both money supply curve as well as the aggregate demand curve will shift to its right.

Refer the goods market graph. Equal change in money supply and aggregate demand.

The price level 40 units.

(Demand curve shifts to its right)