In the figure above, the decrease in the interest rate from i1 to i2 can be explained by ________.

Question

In the figure above, the decrease in the interest rate from i1 to i2 can be explained by ________.

BlackTom AI · Accepted Answer

To start, let's identify what the figure is illustrating: the interest rate versus the quantity of money, with the money supply curve shown as a vertical line moving from MS1 to MS2, and the money demand curve Md sloping downward. The movement from MS1 to MS2 represents an increase in the money supply, which reduces the equilibrium interest rate from i1 to i2. Now evaluate each option in light of that mechanism.

Option 1: an increase in income. If income rose, the money demand Md would shift to the right because people transact more money, which tends to raise the interest rate for a given money supply. Since the diagram shows the interest rate falling due to a rightward shift of the money supply, an increase in income alone would not explain the observed drop in i from i1 to i2. Therefore this option is not consistent with the depicted movement.

Option 2: an increase in money growth. A higher growth rate of the money supply implies the central bank is expanding the money base more quickly over time, effectively shifting the available money supply to the right at any given price level. This rightward shift lowers the equilibrium interest rate from i1 to i2, matching the diagram. This is the explanation that aligns with the shown MS1 to MS2 shift.

Option 3: a decline in the expected price level. If people anticipate a lower price level, real money balances (M/P) rise, which can reduce the interest rate as well. However, in the present diagram the shift is explicitly a change in the money supply (MS1 to MS2), not merely a change in price expectations. Without a change in the nominal money stock, a price-level decline would affect real balances rather than producing the MS shift depicted.

Option 4: a decrease in money growth. Slowing money growth would move the opposite direction, tightening the supply of money or reducing its growth rate, which would tend to raise the interest rate or leave it higher than i2. This contradicts the observed decrease from i1 to i2 in the figure.

In summary, among the given options, the one that coherently explains the fall in the interest rate in the diagram is an increase in money growth, which shifts the money supply curve to the right and lowers the equilibrium rate. The other options either predict the wrong direction of the shift, rely on a different mechanism not represented in the graph, or would not produce the MS2 shift shown.

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In the figure above, the decrease in the interest rate from i1 to i2 can be explained by ________.

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Similar Questions

Assume that the money demand function is left parenthesis (M/P)d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. If the price level is fixed and the supply of money is raised to 2,800, then the equilibrium interest rate will:

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Figure 31-1 Refer to Figure 31-1. When the money supply curve shifts from MS1 to MS2,

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ECON 206-PTS2-Online Final- Requires Respondus LockDown Browser

In the figure above, the decrease in the interest rate from i1 to i2 can be explained by ________.

View Explanation

Log in for full answers

Similar Questions

Assume that the money demand function is left parenthesis (M/P)d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. If the price level is fixed and the supply of money is raised to 2,800, then the equilibrium interest rate will:

Exhibit: Market for Real Money Balances Based on the graph, if the interest rate is r3, then people will ______ bonds and the interest rate will ______.

(Figure: Money Market I) Use Figure: Money Market I. If the interest rate is at rL, and the central bank neither buys nor sells Treasury bills, then the interest rate will:

In the market for money, an interest rate below equilibrium results in an excess ________ money and the interest rate will ________.

Figure 31-1 ​ Refer to Figure 31-1. When the money supply curve shifts from MS1 to MS2,

If the money market is initially in equilibrium at point E, and the central bank sells Treasury bills, then the interest rate will:

More Practical Tools for Students Powered by AI Study Helper

Making Your Study Simpler

Exhibit: Market for Real Money Balances Based on the graph, if the interest rate is r3, then people will bonds and the interest rate will .

In the market for money, an interest rate below equilibrium results in an excess money and the interest rate will .

Figure 31-1 Refer to Figure 31-1. When the money supply curve shifts from MS1 to MS2,