During the heavy Christmas shopping season, sales of retail stores, online sales firms, and other merchants rise significantly. Required:
a. What would you expect to happen to the market for money during the Christmas season?
b. If the Fed took no action, what would happen to nominal interest rates around Christmas?
c. In fact, nominal interest rates do not change significantly in the fourth quarter of the year, due to deliberate Fed policy. Explain and show graphically how the Fed can ensure that nominal interest rates remain stable around Christmas.

A. The MD curve would shift out wards

B. Supply of money is unchanged, with nominal interest rate going up

C. Fed would increase money supply

Explanation:

The accompanying graphs for each answer has been provided in these attachments.

A.

The money demand curve is going to shift outwards or to the right. This is because more money is going to be demanded by people for transaction purposes.

From the graph, we see that money demand increases from MDo to MD1 during Christmas period

B.

If no action is taken by the fed, the supply of money is going to be unchanged while the nominal interest rate would go up.

C.

During this period, the fed would increase supply of money so that the increased need to shop by people can be accommodated without having the interest rate go up.

From the, nominal Interest rate does not change due to the fed policy. Supply of money shifts outward.

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