Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 26: Problem 4

Assume the demand for money curve is fixed and the Fed decreases the money supply. The result is a temporary a. excess quantity of money demanded. b. excess quantity of money supplied. c. increase in the price of bonds. d. increase in the demand for bonds.

Short Answer

Expert verified
The correct answer is \(a\). When the Fed decreases the money supply and the demand for money curve is fixed, it results in a temporary excess quantity of money demanded.

Step by step solution

01

Understanding what happens when supply decreases

The basis of this question lies in understanding the basic principle of economics - the law of demand and supply. According to this principle, when supply decreases while demand stays the same, there is an excess demand for money in the economy. That is, people want more money than there is available.
02

Applying the Principle of Supply and Demand to the Options

With the background knowledge that a decrease in supply with constant demand leads to more demand than supply, the options can be evaluated. Since we have a situation of excess demand for money, we can directly conclude that option 'a', that is, there will be a temporary excess quantity of money demanded, is the correct answer.
03

Validate the Answer by Contradicting other Options

Further solidifying the choice, one can look into the other options. If there's a decrease in money supply, there won't be an excess supply of money (option 'b'). As for options 'c' and 'd', the price and demand for bonds are a separate concern which is affected by interest rates and not directly tied to the supply of money in this context. Hence, they can be eliminated. So, the correct answer is 'a'. When there is a decrease in supply of money with the demand for money kept the same, a temporary excess quantity of money is demanded.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Starting from an equilibrium at \(E_{1}\) in Exhibit \(12,\) a rightward shift of the money supply curve from \(M S_{1}\) to \(M S_{2}\) would cause an excess a. demand for money, leading people to sell bonds. b. supply of money, leading people to buy bonds. c. supply of money, leading people to sell bonds. d. demand for money, leading people to buy bonds.

Using the aggregate supply and demand model, assume the economy is in equilibrium on the intermediate portion of the aggregate supply curve. A decrease in the money supply will decrease the price level and a. lower both the interest rate and real GDP. b. raise both the interest rate and real GDP. c. lower the interest rate and raise real GDP. d. raise the interest rate and lower real GDP.

Based on the equation of exchange, the money supply in the economy is calculated as a. \(M=V / P Q\) b. \(M=V(P Q)\) c. \(M V=P Q\) \(\mathrm{d} . M=P Q-V\)

Which of the following is \(n o t\) an issue in the Keynesian-monetarist debate? a. The importance of monetary versus fiscal policy b. The importance of a change in the money supply c. The importance of the crowding-out effect d. All of the above

Assume the demand for money curve is stationary and the Fed increases the money supply. The result is that people a. increase the supply of bonds, thus driving up the interest rate. b. increase the supply of bonds, thus driving down the interest rate. c. increase the demand for bonds, thus driving up the interest rate. d. increase the demand for bonds, thus driving down the interest rate.
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free