4. Changes in the money supply The following graph represents the money market in a hypothetical economy. This economy has a central bank, similar to the Bank of Canada, called the Fed. Unlike in Canada, the economy is closed (that is, the economy does not interact with other economies in the world). The money market is currently in equilibrium at an interest rate of 2.5% and a quantity of money equal to $0.4 trillion, as indicated by the grey star. INTEREST RATE (Percent) 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 Money Demand 0.1 0.2 Money Supply 0.4 0.5 0.6 0.7 0.3 MONEY (Trillions of dollars) 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 point. To do this, the Fed will use open- market operations to ▼ the money by the public.

4. Changes in the money supply The following graph represents the money market in a hypothetical economy. This economy has a central bank, similar to the Bank of Canada, called the Fed. Unlike in Canada, the economy is closed (that is, the economy does not interact with other economies in the world). The money market is currently in equilibrium at an interest rate of 2.5% and a quantity of money equal to $0.4 trillion, as indicated by the grey star. INTEREST RATE (Percent) 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 Money Demand 0.1 0.2 Money Supply 0.4 0.5 0.6 0.7 0.3 MONEY (Trillions of dollars) 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 point. To do this, the Fed will use open- market operations to ▼ the money by the public.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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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…
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3. Changes in the money supply The following graph represents the money market in a hypothetical economy. As in the United States, this economy has a central bank called the Fed, but unlike in the United States, the economy is closed (that is, the economy does not interact with other economies in the world). The money market is currently in equilibrium at an interest rate of 3% and a quantity of money equal to $0.4 trillion, as indicated by the grey star. (?) INTEREST RATE (Percent) 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0 Money Demand 0.1 Money Supply 0.3 0.4 0.5 MONEY (Trillions of dollars) 0.2 0.6 0.7 0.8 New MS Curve New Equilibrium Suppose the Fed announces that it is raising its target interest rate by 75 basis points, or 0.75 percentage point. 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…
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