### Topic: Money Demand and Money Supply Models#### 1.4 Impact of Federal Reserve's Open Market Purchase of Treasury Securities on Interest Rates- **Objective:** Use the money demand and money supply model to show graphically and explain the effect on interest rates of the Federal Reserve’s open market purchase of Treasury securities.When the Federal Reserve purchases Treasury securities in the open market, it increases the supply of money available in the economy. This action shifts the money supply curve to the right. Graphically, this can be shown as a rightward shift in the money supply curve (Ms1 to Ms2), while the money demand curve (Md) remains unchanged. As a result of this shift, the equilibrium interest rate falls from its initial level (i1) to a new lower level (i2). Therefore, an open market purchase of Treasury securities by the Federal Reserve leads to a decrease in interest rates.#### 1.5 Effect on Interest Rates if Real GDP Increases- **Objective:** Use the money demand and money supply model to show graphically and briefly explain the effect on the interest rate if real GDP increases.An increase in real GDP typically leads to an increase in the demand for money as businesses and consumers require more money for transactions. This shifts the money demand curve to the right. Graphically, this can be shown as a rightward shift in the money demand curve (Md1 to Md2), while the money supply curve (Ms) remains unchanged.As a result of this shift, the equilibrium interest rate rises from its initial level (i1) to a new higher level (i2). Therefore, an increase in real GDP leads to an increase in interest rates.### Detailed Graph Explanation- **Axes:** The vertical axis represents the interest rate, while the horizontal axis represents the quantity of money.- **Curves:** - **Money Demand Curve (Md):** Downward sloping, indicating that as the interest rate decreases, the quantity of money demanded increases. - **Money Supply Curve (Ms):** Vertical, indicating that the supply of money is fixed by the central bank at any given point in time.For each scenario:- **1.4:** Ms shifts right from Ms1 to Ms2. The new equilibrium point indicates a lower interest rate.- **1.5:** Md shifts right from Md1 to Md2. The new equilibrium point indicates a higher interest rate.These graphical illustrations help in understanding

Government securities sales and purchases are referred to as open market operations.When the…

1.4 Use the money demand and money supply model to show graphically and explain the effect on interest rates of the Federal Reserve's open market purchase of Treasury securities. 1.5 Use the money demand and money supply model to show graphically and briefly explain the effect on the interest rate if real GDP increases.

1.4 Use the money demand and money supply model to show graphically and explain the effect on interest rates of the Federal Reserve's open market purchase of Treasury securities. 1.5 Use the money demand and money supply model to show graphically and briefly explain the effect on the interest rate if real GDP increases.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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