Figure 10.4 -Refer to Figure 10.4..Suppose the economy's equilibrium starts out with an output gap of $\hat{Y}$ ₁,and real GDP increases so the output gap increases to $\hat{Y}$ ₂.If the Bank of Canada wants to keep the interest rate at the target,the money demand curve will ________ and the money supply curve will ________. A) shift from MD₁ to MD₂; shift from MS₁ to MS₂ B) shift from MD₂ to MD₁; shift from MS₂ to MS₁ C) remain at MD₁; remain at MS₁ D) remain at MD₂; remain at MS₂

Question

Quizplus · Accepted Answer

When the output gap increases from $\hat{Y}$ ₁ to $\hat{Y}$ ₂, it implies an increase in aggregate demand. This puts pressure on interest rates to rise. However, if the Bank of Canada wants to keep the interest rate at the target, it needs to increase the money supply. This can be done by shifting the money demand curve from MD₁ to MD₂ and simultaneously shifting the money supply curve from MS₁ to MS₂ to keep the interest rate at the target level. Hence, the correct answer is A, i.e. shift from MD₁ to MD₂; shift from MS₁ to MS₂.

Figure 104 -Refer to Figure 10 Y^\hat{Y}Y^ ₁,And Real GDP Increases So the Output Gap Increases To Equilibrium

Figure 104

-Refer to Figure 10 $\hat{Y}$ ₁,And Real GDP Increases So the Output Gap Increases To Equilibrium