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. 55 50 New MS Curve Money Demand 4.5 4.0 New Equilibrium 3.5 3.0 25 20 Money Supply 15 0.1 02 03 0.4 0. 0.6 07 08 MONEY (Trillions of dollars) 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 v 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. Suppose the following graph shows the aggregate demand curve for this economy. The Fed's policy of targeting a higher interest rate will the cost of borrowing, causing residential and business investment spending to and the quantity of output demanded to at each price level. INTEREST RATE (Percent)
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. 55 50 New MS Curve Money Demand 4.5 4.0 New Equilibrium 3.5 3.0 25 20 Money Supply 15 0.1 02 03 0.4 0. 0.6 07 08 MONEY (Trillions of dollars) 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 v 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. Suppose the following graph shows the aggregate demand curve for this economy. The Fed's policy of targeting a higher interest rate will the cost of borrowing, causing residential and business investment spending to and the quantity of output demanded to at each price level. INTEREST RATE (Percent)
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:3. Changes in the money supply
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.
5.5
5.0
New MS Curve
Money Demand
4.5
4.0
New Equilibrium
3.5
3.0
2.5
2.0
Money Supply
1.5
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
MONEY (Trillions of dollars)
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.
Suppose the following graph shows the aggregate demand curve for this economy. The Fed's policy of targeting a higher interest rate will
the cost of borrowing, causing residential and business investment spending to
and the quantity of output demanded to
at each price level.
INTEREST RATE (Percent)
Transcribed Image Text:Shift the curve on the graph to show the general impact of the Fed's new interest rate target on aggregate demand.
Aggregate Demand
Aggregate Demand
OUTPUT
PRICE LEVEL
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