Equilibrium and disequilibrium in the money marketThe following diagram represents the money market in the United States, which is currently in equilibrium, as indicated by the grey star. Suppose the Federal Reserve (the Fed) announces that it is raising its target interest rate by 25 basis points, or 0.25%. It would achieve this bydecrease increasethemoney supplymoney demand. Use the green line (triangle symbols) on the preceding graph to illustrate the effects of this policy. Place the black point (plus symbol) on the graph to indicate the new equilibrium interest rate and quantity of money. The sequence of events that results in a new equilibrium interest rate, after the Fed makes the change you selected, may be described as follows: Because there ismorelessmoney in the financial system, the quantity of money demanded increasesdecreases , which means that bond issuers can issue bonds at lower interest rates and stillmust raise the interest they paysell bonds. This process continues until the new equilibrium interest rate is achieved. ### Money Supply and Demand GraphThis graph illustrates the relationship between the quantity of money and interest rates. It includes the following elements:#### Axes:- **X-Axis (Horizontal):** Quantity of Money (Trillions of dollars), ranging from 0.6 to 1.4.- **Y-Axis (Vertical):** Interest Rate (Percent), ranging from 2.0 to 6.0.#### Curves:- **Money Demand (Blue Line):** A downward-sloping line indicating that as the quantity of money increases, the interest rate decreases.- **Money Supply (Orange Line):** A vertical line indicating the fixed supply of money in the economy.#### Intersection:- **Equilibrium Point (Star):** Located at the intersection of the Money Demand and Money Supply lines, showing the balance where the quantity of money supplied equals the quantity demanded at an interest rate of 4.0 percent.#### Legend:- **New Curve (Green Triangle):** Represents a potential new curve, though not drawn on the graph.- **New Equilibrium (Black Plus Sign):** Indicates a hypothetical new equilibrium point if the money supply or demand changes.The graph is an educational tool used to illustrate key concepts in monetary economics, such as how money supply and demand influence interest rates.

Answered: The following diagram represents the…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Equilibrium and disequilibrium in the money market

The following diagram represents the money market in the United States, which is currently in equilibrium, as indicated by the grey star.

Suppose the Federal Reserve (the Fed) announces that it is raising its target interest rate by 25 basis points, or 0.25%. It would achieve this by

decrease

increase

the

money supply

money demand

. Use the green line (triangle symbols) on the preceding graph to illustrate the effects of this policy. Place the black point (plus symbol) on the graph to indicate the new equilibrium interest rate and quantity of money.

The sequence of events that results in a new equilibrium interest rate, after the Fed makes the change you selected, may be described as follows: Because there is

less

money in the financial system, the quantity of money demanded

increases

decreases

, which means that bond issuers

can issue bonds at lower interest rates and still

must raise the interest they pay

sell bonds. This process continues until the new equilibrium interest rate is achieved.

### Money Supply and Demand Graph

This graph illustrates the relationship between the quantity of money and interest rates. It includes the following elements:

#### Axes:
- **X-Axis (Horizontal):** Quantity of Money (Trillions of dollars), ranging from 0.6 to 1.4.
- **Y-Axis (Vertical):** Interest Rate (Percent), ranging from 2.0 to 6.0.

#### Curves:
- **Money Demand (Blue Line):** A downward-sloping line indicating that as the quantity of money increases, the interest rate decreases.
- **Money Supply (Orange Line):** A vertical line indicating the fixed supply of money in the economy.

#### Intersection:
- **Equilibrium Point (Star):** Located at the intersection of the Money Demand and Money Supply lines, showing the balance where the quantity of money supplied equals the quantity demanded at an interest rate of 4.0 percent.

#### Legend:
- **New Curve (Green Triangle):** Represents a potential new curve, though not drawn on the graph.
- **New Equilibrium (Black Plus Sign):** Indicates a hypothetical new equilibrium point if the money supply or demand changes.

The graph is an educational tool used to illustrate key concepts in monetary economics, such as how money supply and demand influence interest rates.

Definition Definition Financial market that deals in securities or assets that are short-term in nature. The money market is responsible for keeping up the liquidity of the businesses and the organizations. These securities are usually held for a period of 12 months or less and are issued by institutions that require cash or funds for their short-term cash flow requirements. The money market is regulated by the federal government.

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