Monetary Economics (ECS3701) Selected Examination Questions and suggested solutions ch:15

15-1: Explain how the demand and supply of money determine the market interest rate - --The opportunity cost of holding money is the higher interest forgone by not holding other financial assets instead. -Along a given money demand curve, the quantity of money demanded relates inversely to the interest rate. -The demand for money curve *shifts rightward* as a result of an *increase in the price level, an increase in real GDP, or an increase in both.* -Demand for Money - -The money demand curve slopes downward. -As the interest rate falls, other things constant, so does the opportunity cost of holding money; the quantity of money demanded increases. -Effect of an Increase in the Money Supply - --Movement along the money demand curve -15-2: Outline the steps between an increase in the money supply and an increase in equilibrium output - --The Fed determines the supply of money, which is assumed to be independent of the interest rate. -The intersection of the supply and demand curves for money determines the market interest rate. -In the short run, an increase in the supply of money reduces the interest rate, which increases investment.