The following diagram represents the money market in the United States, which is currently in equilibrium, as indicated by the grey star. INTEREST RATE (Percent) 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 0.6 Money Demand Money Supply 0.7 0.8 0.9 1.0 1.1 1.2 1.3 QUANTITY OF MONEY (Trillions of dollars) New Curve + New Equilibrium
The following diagram represents the money market in the United States, which is currently in equilibrium, as indicated by the grey star. INTEREST RATE (Percent) 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 0.6 Money Demand Money Supply 0.7 0.8 0.9 1.0 1.1 1.2 1.3 QUANTITY OF MONEY (Trillions of dollars) New Curve + New Equilibrium
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:The following diagram represents the money market in the United States, which is currently in equilibrium, as indicated by the grey star.
INTEREST RATE (Percent)
6.0
5.5
5.0
4.5
4.0
3.5
3.0
2.5
2.0
0.6
Money Demand
Money Supply
0.7 0.8 0.9 1.0 1.1 1.2 1.3
QUANTITY OF MONEY (Trillions of dollars)
55
New Curve
New Equilibrium
Transcribed Image Text:Suppose the Federal Reserve (the Fed) announces that it is raising its target interest rate by 75 basis points, or 0.75%. It would achieve this by
the
▼. 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
money in the financial system, the quantity of money demanded
, which means that bond issuers
sell bonds. This process continues until the new equilibrium interest rate is achieved.
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