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If the rate of inflation increase the fed should

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If the rate of inflation increase, the Fed should increase the Federal Funds Rate. Because the increase in the FFR will have a decrease in Money supply.
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If there is a economic contraction, the Fed should lower the Federal Funds Rate, because the decrease in FFR will have an increase in Money supply to solve the economic contraction. 3. Briefly describe the effects of an increase in interest rates on the demand for money in a. the classical Md=Kpy Interest rate will not affect money demand, because it doesn’t play role in classical model. b. the Keynesian model Md=f(i, Y) The changes in the interest rate affect the Demand of money. Increase in Interest rate will lead to a decrease in quantity demanded. c. the monetarist model. In the monetarist model, the money demand depend on the return to money compared to the return on bonds, the return on money compared to the return on equity and the return on money compared to the return on assets. If the interest rate of all those change together , it would not affect the money demand. The demand of money only changes when the return of assets changes.
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