Problem: We are studying the money supply and the equilibrium interest rate. I am confused by the problem (s) presented below and am not sure how to calculate or answer the question. Any and all help is appreciated, thank you!
- Assume that the money market is initially in equilibrium and that the money supply is then increased. Explain the adjustment toward a new equilibrium interest rate. Will bond prices be higher or lower at the new equilibrium rate of interest? What effects would you expect the interest rate change to have on the levels of output, employment, and prices? Answer the same questions for a decrease in the money supply.