In the money market shown in the diagram above, which statement concerning this
ID: 2440916 • Letter: I
Question
In the money market shown in the diagram above, which statement concerning this diagram is likely to be true?
There has been a fall in interest rates that has decreased the demand for money.
There has been a fall in interest rates that has increases the demand for money.
There has been a substantial decrease in income and planned transactions.
There has been a substantial increase in income and planned transactions.
The Federal Reserve has lowered interest rates using monetary policy.
A.There has been a fall in interest rates that has decreased the demand for money.
B.There has been a fall in interest rates that has increases the demand for money.
C.There has been a substantial decrease in income and planned transactions.
D.There has been a substantial increase in income and planned transactions.
E.The Federal Reserve has lowered interest rates using monetary policy.
The Interest Ms Rate 5% 3% Md 1 Md 2 $1,000 Quantity of Money (Billions of Dollars)Explanation / Answer
It is the supply and demand for the money which determines the interest rate in the economy. The money supply curve is vertical which indicates that the money supply is independent of the interest rate. There is inverse relationship between the interest rate and the demand for money, for an instance if the interest rate is above the equilibrium level the people wil try to convert his asset into interest bearing assets or deposits and this results a lower demand for money.
The level of income will affect the demand for money, when the income is high the expenditure is also high so people will use more money for transactions and this is an increase in the demand for money. Here the graph shows the leftward shift of the money demand curve, this should be because of a reduction in the income of the people so the expenditure will fall and the demand for will reduce.
ANS: There has been a substantial decrease in income and planned transactions.
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