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 3.5% and a quantity of money equal to $0.4 trillion, as indicated by the grey star.
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 3.5% and a quantity of money equal to $0.4 trillion, as indicated by the grey star.
Chapter22: Aggregate Demand And Aggregate Supply
Section: Chapter Questions
Problem 12P
Related questions
Question
The following graph represents the
![Suppose the following graph shows the aggregate demand curve for this economy. The Fed's policy of targeting a higher interest rate will
and the quantity of output demanded to
the cost of borrowing, causing residential and business investment spending to
at each inflation rate.
Shift the curve on the graph to show the general impact of the Fed's new interest rate target on aggregate demand.
INFLATION RATE
OUTPUT
Aggregate Demand
Aggregate Demand
?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F81206221-7ef3-45b8-bcef-ee5db0e174f5%2F8a4dc7df-6562-441d-8343-72aa6543b611%2Flfaytcv_processed.png&w=3840&q=75)
Transcribed Image Text:Suppose the following graph shows the aggregate demand curve for this economy. The Fed's policy of targeting a higher interest rate will
and the quantity of output demanded to
the cost of borrowing, causing residential and business investment spending to
at each inflation rate.
Shift the curve on the graph to show the general impact of the Fed's new interest rate target on aggregate demand.
INFLATION RATE
OUTPUT
Aggregate Demand
Aggregate Demand
?
![INTEREST RATE (Percent)
5.5
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
0
Money Demand
0.1
0.2
Money Supply
0.3
0.4
MONEY (Trillions of dollars)
0.5
0.6
0.7
0.8
New MS Curve
+
New Equilibrium
Suppose the Fed announces that it is raising its target interest rate by 50 basis points, or 0.5 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 location. Place the black point (plus symbol) at the new equilibrium interest rate and quantity of money.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F81206221-7ef3-45b8-bcef-ee5db0e174f5%2F8a4dc7df-6562-441d-8343-72aa6543b611%2Frqept9_processed.png&w=3840&q=75)
Transcribed Image Text:INTEREST RATE (Percent)
5.5
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
0
Money Demand
0.1
0.2
Money Supply
0.3
0.4
MONEY (Trillions of dollars)
0.5
0.6
0.7
0.8
New MS Curve
+
New Equilibrium
Suppose the Fed announces that it is raising its target interest rate by 50 basis points, or 0.5 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 location. Place the black point (plus symbol) at the new equilibrium interest rate and quantity of money.
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