How does a change in the quantity of money change the interest rate in the short run?
What will be an ideal response?
In the short run an increase in the quantity of money lowers the interest rate and a decrease in the quantity of money raises the interest rate. Suppose the Federal Reserve increases the quantity of money. At the initial interest rate people hold more money than the quantity they demand. To restore the amount of money they hold to equality with the quantity demanded, people use the surplus in the loanable funds market to buy bonds. The price of a bond rises which means that the interest rate on the bond falls. When the Federal Reserve decreases the quantity of money, the reverse occurs: At the initial interest rate people have less money than the quantity they demand so they sell bonds in the loanable funds market to acquire more money. Selling bonds lowers their price which raises the interest rate.
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Since 1972, the world price of oil has been largely determined by OPEC, which controls about 75 percent of the world's proven oil reserves. Since 1972 the price of oil has
A) fluctuated. OPEC's situation is an example of a prisoner's dilemma. B) risen slowly, but steadily. Members of OPEC fear that if they raise the price of oil too quickly this will lead oil-buying nations to accuse OPEC of price gouging, which is illegal under international law. C) steadily fallen through the 1970s, then risen continually in the years since then. OPEC's actions are an example of implicit collusion. D) been tied by OPEC to the rate of inflation in the United States. If, for example, the rate of inflation is 5 percent in one year, OPEC will raise the price of oil by 5 percent the next year.
The store of value characteristic of money refers to the fact that:
A. people save most of their money. B. money is not valuable unless it is stored. C. money allows people to shift purchasing power into the future. D. money is the only way people have to store value.