04.05THE MONEY MARKET

For each prompt below, carefully and thoroughly follow the directions. For the graphs, be certain to accurately label all axes, curves, and equilibria points. Use arrows to indicate the direction of any shifts.

Assume that an increasingly digital society decreases their market transactions as they spend more time on non-market online activities.

(a) Draw a fully labeled money market, showing the impact of the change on the equilibrium nominal interest rate.

(b) Based on the change in part (a), what will happen to the price of previously issued bonds? Explain.

(c) On a new graph, illustrate the change in the money supply that would be required to restore the original equilibrium interest rate.

(d) What could shift the money supply in the way indicated in part (c)?

(e) Assume that the original equilibrium nominal interest rate is restored. If the real interest rate turns out to be greater, does that mean the price level has increased or decreased? Explain.