Suppose the Federal Reserve ("the Fed") shifts to a contractionary monetary policy by selling bonds through open-market operations. Assume that this policy is unanticipated. This problem will work through the short-run effects of this move. The following graph shows the money demand and money supply curves. Show the effect of the Fed's contractionary monetary policy by shifting one or both of the curves, and ignore any potential feedback effects. As a result of the Fed's policy, the interest rate to INTEREST RATE (Percent) 15 24 0 0 300 600 Money Supply 900 Money Demand 1200 1500 1800 QUANTITY OF MONEY (Billions of dollars) Money Demand -0- Money Supply The following graph shows the demand for investment. Show the short-run effect of the Fed's contractionary monetary policy by shifting the curve or moving the point along the curve. Again, ignore any potential feedback effects. Be sure the new interest rate corresponds to the interest rate you have on the top graph. INTEREST RATE (Percent) 15 24 0 40 20 120 160 200 240 INVESTMENT (Billions of dollars) The following graph shows the aggregate demand (AD) and aggregate supply (AS) curves in the goods and services market before the Fed implements its contractionary policy. Illustrate the effect of the change in investment demand you illustrated on the graph by shifting the appropriate curve on the graph. PRICE LEVEL on the top graph. INTEREST RATE (Percent) 18 40 80 120 Ο 160 INVESTMENT (Billions of dollars) 200 240 The following graph shows the aggregate demand (AD) and aggregate supply (AS) curves in the goods and services market before the Fed implements its contractionary policy. Illustrate the effect of the change in investment demand you illustrated on the graph by shifting the appropriate curve on the graph. REAL GDP (Trillions of dollars) AD AS AD Fill in the blanks to interpret the effect of the Fed's policy. AS When the Fed sells bonds, the amount of money in circulation in the economy businesses to invest This drives interest rates which causes demand, in capital improvements such as new factories and upgraded equipment. The result is in the equilibrium price level, and in aggregate in the equilibrium level of real GDP.
Suppose the Federal Reserve ("the Fed") shifts to a contractionary monetary policy by selling bonds through open-market operations. Assume that this policy is unanticipated. This problem will work through the short-run effects of this move. The following graph shows the money demand and money supply curves. Show the effect of the Fed's contractionary monetary policy by shifting one or both of the curves, and ignore any potential feedback effects. As a result of the Fed's policy, the interest rate to INTEREST RATE (Percent) 15 24 0 0 300 600 Money Supply 900 Money Demand 1200 1500 1800 QUANTITY OF MONEY (Billions of dollars) Money Demand -0- Money Supply The following graph shows the demand for investment. Show the short-run effect of the Fed's contractionary monetary policy by shifting the curve or moving the point along the curve. Again, ignore any potential feedback effects. Be sure the new interest rate corresponds to the interest rate you have on the top graph. INTEREST RATE (Percent) 15 24 0 40 20 120 160 200 240 INVESTMENT (Billions of dollars) The following graph shows the aggregate demand (AD) and aggregate supply (AS) curves in the goods and services market before the Fed implements its contractionary policy. Illustrate the effect of the change in investment demand you illustrated on the graph by shifting the appropriate curve on the graph. PRICE LEVEL on the top graph. INTEREST RATE (Percent) 18 40 80 120 Ο 160 INVESTMENT (Billions of dollars) 200 240 The following graph shows the aggregate demand (AD) and aggregate supply (AS) curves in the goods and services market before the Fed implements its contractionary policy. Illustrate the effect of the change in investment demand you illustrated on the graph by shifting the appropriate curve on the graph. REAL GDP (Trillions of dollars) AD AS AD Fill in the blanks to interpret the effect of the Fed's policy. AS When the Fed sells bonds, the amount of money in circulation in the economy businesses to invest This drives interest rates which causes demand, in capital improvements such as new factories and upgraded equipment. The result is in the equilibrium price level, and in aggregate in the equilibrium level of real GDP.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Suppose the Federal Reserve ("the Fed") shifts to a contractionary monetary policy by selling bonds through open-market operations. Assume that this
policy is unanticipated. This problem will work through the short-run effects of this move.
The following graph shows the money demand and money supply curves. Show the effect of the Fed's contractionary monetary policy by shifting one
or both of the curves, and ignore any potential feedback effects. As a result of the Fed's policy, the interest rate to
INTEREST RATE (Percent)
15
24
0
0
300
600
Money Supply
900
Money Demand
1200
1500
1800
QUANTITY OF MONEY (Billions of dollars)
Money Demand
-0-
Money Supply
The following graph shows the demand for investment. Show the short-run effect of the Fed's contractionary monetary policy by shifting the curve or
moving the point along the curve. Again, ignore any potential feedback effects. Be sure the new interest rate corresponds to the interest rate you have
on the top graph.
INTEREST RATE (Percent)
15
24
0
40
20
120
160
200
240
INVESTMENT (Billions of dollars)
The following graph shows the aggregate demand (AD) and aggregate supply (AS) curves in the goods and services market before the Fed
implements its contractionary policy. Illustrate the effect of the change in investment demand you illustrated on the graph by shifting the appropriate
curve on the graph.
Transcribed Image Text:PRICE LEVEL
on the top graph.
INTEREST RATE (Percent)
18
40
80
120
Ο
160
INVESTMENT (Billions of dollars)
200
240
The following graph shows the aggregate demand (AD) and aggregate supply (AS) curves in the goods and services market before the Fed
implements its contractionary policy. Illustrate the effect of the change in investment demand you illustrated on the graph by shifting the appropriate
curve on the graph.
REAL GDP (Trillions of dollars)
AD
AS
AD
Fill in the blanks to interpret the effect of the Fed's policy.
AS
When the Fed sells bonds, the amount of money in circulation in the economy
businesses to invest
This drives interest rates
which causes
demand,
in capital improvements such as new factories and upgraded equipment. The result is
in the equilibrium price level, and
in aggregate
in the equilibrium level of real GDP.
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