Evaluate whether each of the following statements is true or false. Explain your

Question

Evaluate whether each of the following statements is true or false. Explain your answer and provide supporting rationale.

a.If the real money demand is greater than the real money supply, interest rates must rise to reach equilibrium in the money market as institutions sell bonds to obtain more money.

b.The federal government’s control of the money supply, which influences interest rates, is the primary tool that policy makers use to impact the macro economy.

c.A decrease in the reserve requirement decreases the money supply because banks have fewer reserves.

d.The real money demand curve shows how households and businesses change their spending in response to changes in the interest rate.

e.Both an increase in the nominal money supply by the Federal Reserve and an increase in the price level will cause the real money supply curve to shift to the right.

Explanation / Answer

(a) TRUE

With higher money demand, public & institutions sell bonds to get money. There is a higher supply of bonds which increases interest rates.

(b) TRUE

Fed controls the money supply, which interacts with money demand curve to determned interest rate. An increase/decrease in money supply determines the level of inflation in the economy, too.

(c) FALSE

Decrease in reserve requirement signifies that, banks now need to set aside a lower portion of their reserves which is not available for lending. In other words, amount of reserves available for lending increases, resulting in increased money supply.

(d) TRUE

Real money demand curve shows the demand for money by household & businesses, at every interest rate. It is downward sloping.

(e) FALSE

Real money supply = nominal money supply / price level

So, while increase in nominal money supply will increase real money supply causing real money supply curve shift toward right, an increase in price level will decrease the real money supply causing the curve shift toward left.

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