The following graph represents the money market for some hypothetical economy. This economy is similar to the United States in the sense that it hasa central bank called the Fed, but a major difference is that this economy is closed (and therefore does not have any interaction with other worldeconomies). The money market is currently in equilibrium at an interest rate of 3% and a quantity of money equal to $0.4 trillion, designated on thegraph by the grey star symbol.INTEREST RATE (Percent)5.04.54.03.53.02.52.01.51.00Money Demand0.10.20.30.4Money Supply0.50.60.70.8New MS CurveNew Equilibrium? Suppose the Fed announces that it is raising its target interest rate by 75 basis points, or 0.75 percentage points. To do this, the Fed will use open-market operations tothemoney bythe 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 thecorrect 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 higher interest ratewillthe cost of borrowing, causing residential and business investment spending toat each price level.and the quantity of outputdemanded toShift the curve on the graph to show the general impact of the Fed's new interest rate target on aggregate demand.RICE LEVELAggregate Demand?

Equilibrium in the money market occurs at the intersection of money demand and money supply curves.

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 3% and a quantity of money equal to $0.4 trillion, designated on the graph by the grey star symbol. 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 0.2 0.3 0.4 Money Supply + 0.6 0.5 0.7 0.8 New MS Curve New Equilibrium ?

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 3% and a quantity of money equal to $0.4 trillion, designated on the graph by the grey star symbol. 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 0.2 0.3 0.4 Money Supply + 0.6 0.5 0.7 0.8 New MS Curve New Equilibrium ?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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