What is meant by consumer surplus? How is it calculated? What ...

[big1devin]

What is meant by consumer surplus? How is it calculated?
 
  What will be an ideal response?

Question 2

Using the money demand and money supply model, show and explain why the Federal Reserve cannot achieve a target for both the money supply and an interest rate.
 
  What will be an ideal response?

[Sassygurl126]

Answer to Question 1

Consumer surplus is the difference between the willingness to pay and the price paid for a good. It is measured as the area between the consumer's willingness to pay and the market price up to the equilibrium quantity.

Answer to Question 2

The Fed does not control money demand, so it cannot achieve a target for both the money supply and an interest rate. In the graph below, the Fed could achieve an interest rate of 4 percent or a money supply of 500 billion. It appears that since the money market is in equilibrium at point A with an interest rate of 4 percent and the money supply of 500 billion that the Fed can achieve both targets. If money demand shifts, however, the Fed must choose whether to maintain the interest rate target of 4 percent or the money supply target of 500 billion.