-The Figure Above Shows the Demand for Money in Kiteland

question 68

Essay

-The figure above shows the demand for money in Kiteland.
a) If the Kiteland Central Bank has set the quantity of money so that the equilibrium interest rate is 4 percent, draw the supply of money curve.
b) Suppose Kiteland's real GDP increases so that the demand for money changes by 100 billion yaks. The Kiteland Central Bank takes no actions. Show the effects of this event on your figure. What happens to the interest rate? What happens to the quantity of money in the economy?
c) If the Central Bank wants to prevent the interest rate from changing, what must it do to the quantity of money? Draw the new supply of money curve.
d) In order to change the quantity of money to keep the interest rate constant, suppose the Kiteland Central Bank uses open market operations. Does it make an open market purchase or an open market sale? Explain your answer.

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Definitions:

Cyclical Unemployment

Joblessness attributable to fluctuations in the economic cycle, such as recessions, leading to reduced demand for goods and services.

Unemployment Rate

The proportion of the employable population that is not working but actively looking for work.

Recovery Phase

A stage of the economic cycle where activity starts increasing again after a downturn, leading to higher employment and output levels.

Business Cycle

The progression of economic activity through expansion, peak, contraction, and trough phases.