An economy begins in long-run equilibrium, and then a change in government regul

Question

An economy begins in long-run equilibrium, and then a change in government regulations allows banks to start paying interest on checking accounts. Recall that the money stock is the sum of currency and demand deposits, including checking accounts, so this regulatory change makes holding money more attractive. How does this change affect the demand for money? What happens to the velocity of money? If the Fed keeps the money supply constant, what will happen to output and prices in the short run and in the long run? If the goal of the Fed is to stabilize the price level, should the Fed keep the money supply constant in response to this regulatory change? If not, what should it do? Why? If the goal of the Fed is to stabilize output, how would your answer to part (d) change?

Explanation / Answer

Ans:

We are told that the Economy is in the long-run Equilibrium. The policy regulation then allows paying interest on checking accounts which previously was not the case. This would imply that there is an increase in the interest rates in the economy. This tells us that there is more demand for money than there is supply.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.