An Increase in Money Demand. An increase in real GDP, the price level, or transfer costs, for example, will increase the quantity of money demanded at any interest rate r, increasing the demand for money from D1 to D2. The quantity of money demanded at interest rate r rises from M to M′. M/P = real money balances. This equation states that the quantity of real money balances demanded is proportional. ΔY/Y depends on growth in the factors of. The demand for money as a demand for real money balances is summarized above. The quantity of real money demanded rises when real income rises, but falls when nominal interest rates rise. Money market equilibrium. Figure 10.1 combines the demand curve for real money balances with the money supply function to give a money market diagram.

The Quantity Of Real Money Balances Demanded Depends On The Number
Real Money Balances Definition
The Quantity Of Real Money Balances Demanded Depends On The Current
The Quantity Of Real Money Balances Demanded Depends On Time

Us the Keynesian cross to explain why fiscal policy has a multiplied effect on national income.
Use the theory of liquidity preference to explain why an increase in the money supply lowers the interest rate. What does this explanation assume about the price level?
Us the Keynesian cross to predict the impact of (i) an increase in government purchases, (ii) an increase in taxes, and (iii) an equal increase in government purchases and taxes.
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Quantity

1. Which of the following is NOT exogenous in the IS-LM model?
A. The interest rate
B. Taxes
C. The price level
D. Government expenditure
2. The relationship between interest rates and the level of income that arises in the market
for goods and services is called the
A. LM curve.
B. IS curve.
C. aggregate demand curve.
D. aggregate supply curve.
3. The investment function and the IS curve slope
A. upward because higher interest rates induce more investment.
B. upward because higher interest rates induce less investment.
C. downward because higher interest rates induce more investment.
D. downward because higher interest rates induce less investment.
4. Exogenous increases in the supply of loanable funds shift the
A. LM curve outward.
B. LM curve inward.
C. IS curve outward.
D. IS curve inward.
5. The LM curve is drawn for a given
A. real income.
B. nominal income.
C. money supply.
D. interest rate.
6. The quantity of real money balances demanded depends on
A. consumption.
B. real income.
C. nominal income.
D. the price level.

The Quantity Of Real Money Balances Demanded Depends On The Number

7. The relationship between the interest rate and the level of income that arises in the
market for money balances is called the
A. LM curve.
B. IS curve.
C. aggregate demand curve.
D. aggregate supply curve.
8. If the central bank increased the supply of real money balances, then the LM curve would

Real Money Balances Definition

A. become steeper.
B. become flatter.
The Quantity Of Real Money Balances Demanded Depends On

C. shift inward.
D. shift outward.
9. The economy is projected to have a GDP level of $1.2 trillion this year, but the GDP level associated with long-run equilibrium is $1.8 trillion. Ceteris paribus, if the government purchases multiplier is 3, how much should government purchases increase, according to the Keynesian model?
A. $100 billion
B. $200 billion
C. $300 billion

The Quantity Of Real Money Balances Demanded Depends On The Current

D. $400 billion

The Quantity Of Real Money Balances Demanded Depends On Time

10. How does your answer change if the government purchases multiplier is adjusted downward to 2?
11. Which answers above are likely to cause overshooting? Undershooting? Calculate how much (assuming a government purchases multiplier of 3).