1) Graphically show how the below events affect the demand for money with a liquidity preference graph (r on the y-axis and qty of money on the x-axis). In each case, show whether there is a shift of the demand curve or supply curve. In addition state and show what happens to interest rate (r) and the qty of money in the economy. YOU HAVE TO DRAW AND LABEL BOTH AXIS FOR FULL CREDIT
a. Due to higher expenses, small retail stores are no longer accepting credit cards.
b. There is an increase in the aggregate price level.
c. The Fed has increased the discount rate.
d. The Fed engages in the open-market selling of U.S. Treasury bills.
2) An economy with a floating exchange rate is facing an inflationary gap tied to an unsustainable increase in the stock market.
a) Graph this situation with and AD/AS model
b) Should the central bank use expansionary or contractionary monetary policy to help with this issue?
c) Should the Fed buy or sell T-Bills to achieve their policy goal?
d) Draw the liquidity preference graph which shows what happens to interest rates (r)
and qty of money with the actions taken in part b.
e) Draw the US currency market (US dollars on x axis/exchange rate in euros on y axis) showing how part d impacts this market.
f) Graph the AD/SRAS/LRAS curves for this action. Be sure to label the inflationary gap that is being closed.
g) Specifically describe how this policy impacts the following (no need for explanations as to why but the direction of effect is required for each item):
1) interest rate
2) investment spending
3) consumer spending
4) real GDP
6) aggregate price level
7) US dollar value (appreciate or depreciate)
8) US exports
9) US imports
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