3. Changes in the money supply The following graph represents the money market for some hypothetical economy. This economy is similar to the United States in the sense that it has a central bank called the Fed, but a major difference is that this economy is closed (and therefore does not have any interaction with other world economies). The money market is currently in equilibrium at an interest rate of 2.5% and a quantity of money equal to $0.4 trillion, designated on the graph by the grey star symbol. INTEREST RATE (Percent) G 6 2 3.5 25 20 15 10 05 Money Demand 0.1 Money Supply 05 MONEY (Trillions of dollars) 02 0.7 New MS Curve New Equilibrium Suppose the Fed announces that it is lowering its target interest rate by 75 basis points, or 0.75 percentage points. To do this, the Fed will use open- market operations to money by the public. Use the green line (triangle symbol) on the previous graph to illustrate the effects of this policy by placing the new money supply curve (MS) in the correct location. Place the black point (plus symbol) at the new equilibrium interest rate and quantity of money. Suppose the following graph shows the aggregate demand curve for this economy. The Fed's policy of targeting a lower interest rate will the cost of borrowing, causing residential and business investment spending to and the quantity of output demanded to at each price level.
3. Changes in the money supply The following graph represents the money market for some hypothetical economy. This economy is similar to the United States in the sense that it has a central bank called the Fed, but a major difference is that this economy is closed (and therefore does not have any interaction with other world economies). The money market is currently in equilibrium at an interest rate of 2.5% and a quantity of money equal to $0.4 trillion, designated on the graph by the grey star symbol. INTEREST RATE (Percent) G 6 2 3.5 25 20 15 10 05 Money Demand 0.1 Money Supply 05 MONEY (Trillions of dollars) 02 0.7 New MS Curve New Equilibrium Suppose the Fed announces that it is lowering its target interest rate by 75 basis points, or 0.75 percentage points. To do this, the Fed will use open- market operations to money by the public. Use the green line (triangle symbol) on the previous graph to illustrate the effects of this policy by placing the new money supply curve (MS) in the correct location. Place the black point (plus symbol) at the new equilibrium interest rate and quantity of money. Suppose the following graph shows the aggregate demand curve for this economy. The Fed's policy of targeting a lower interest rate will the cost of borrowing, causing residential and business investment spending to and the quantity of output demanded to at each price level.
Chapter1: Making Economics Decisions
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Transcribed Image Text:3. Changes in the money supply
The following graph represents the money market for some hypothetical economy. This economy is similar to the United States in the sense that it has
a central bank called the Fed, but a major difference is that this economy is closed (and therefore does not have any interaction with other world
economies). The money market is currently in equilibrium at an interest rate of 2.5% and a quantity of money equal to $0.4 trillion, designated on the
graph by the grey star symbol.
INTEREST RATE (Percent)
4.5
4.0
6
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0
Money Demand
+
0.1
Money Supply
0.3
0.5
0.6
MONEY (Trillions of dollars)
0.2
0.7
0.8
New MS Curve
New Equilibrium
?
Suppose the Fed announces that it is lowering its target interest rate by 75 basis points, or 0.75 percentage points. To do this, the Fed will use open-
market operations to
the
money by
the public.
Use the green line (triangle symbol) on the previous graph to illustrate the effects of this policy by placing the new money supply curve (MS) in the
correct location. Place the black point (plus symbol) at the new equilibrium interest rate and quantity of money.
Suppose the following graph shows the aggregate demand curve for this economy. The Fed's policy of targeting a lower interest rate will
the cost of borrowing, causing residential and business investment spending to
and the quantity of output demanded to
at each price level.
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