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    Money market equilibrium

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    1. Assume that the money market is initially in equilibrium for an economy. Explain with the aid of a diagram how the market adjusts to
    (i) an increase in money supply (ii) an increase in real GDP

    2. Choose any economy in the world.
    What measures did the countryâ??s central bank adopt in the 2008 period, in the face of the worsening global financial crisis? Name 2-3 key measures & describe briefly how it was implemented.
    Which of these measures were effective? Which ones were not? Provide an economic explanation of why do you think so.

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    Solution Preview

    The response addresses the queries posted with references.

    //The given case is based on money market equilibrium during the period of economic crisis in the world. In the later part of the discussion, first the two issues will be discussed that how they could be adjusted and in the next part, a country would be selected to describe the various measures of its central bank during the crisis//

    1. (i) When the money market of the economy remains in the equilibrium stage and the money supply increases in the market, then to adjust the market, suggestive measures should be adopted. At the time of increase in the money supply, the supply of real money exceeds the real money demand in the economy. So, to adjust the money supply in the economy, households and businesses should appreciate the money at the current interest rates. The process will help in converting the liquid money assets into non-money assets and this will help in improving the long term ...

    Solution Summary

    The response addresses the queries posted in 605 words with references.