The following graph represents the money market in a hypothetical economy. This economy has a central bank, but unlike in Canada, 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 2.5% and a quantity of money equal to $0.4 trillion, as indicated by the grey star. INTEREST RATE (Percent) 45 4.0 3,5 3.0 25 2.0 1.5+ 1.0 0.5 0 Money Demand 1 0.1 Money Supply 0,2 0.3 0.4 0.5 MONEY (Trillions of dollars) 0.0 0.7 0.8 ܠܐ New MS Curve New Equilibrium 7 Suppose the central bank announces that it is lowering its target interest rate by 75 basis points, or 0.75 percentage point. To do this, the central bank 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 central bank's policy of targeting a lower 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. arve on the graph to show the general impact of the central bank's new interest rate target on aggres
The following graph represents the money market in a hypothetical economy. This economy has a central bank, but unlike in Canada, 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 2.5% and a quantity of money equal to $0.4 trillion, as indicated by the grey star. INTEREST RATE (Percent) 45 4.0 3,5 3.0 25 2.0 1.5+ 1.0 0.5 0 Money Demand 1 0.1 Money Supply 0,2 0.3 0.4 0.5 MONEY (Trillions of dollars) 0.0 0.7 0.8 ܠܐ New MS Curve New Equilibrium 7 Suppose the central bank announces that it is lowering its target interest rate by 75 basis points, or 0.75 percentage point. To do this, the central bank 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 central bank's policy of targeting a lower 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. arve on the graph to show the general impact of the central bank's new interest rate target on aggres
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:The following graph represents the money market in a hypothetical economy. This economy has a central bank, but unlike in Canada, 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
2.5% and a quantity of money equal to $0.4 trillion, as indicated by the grey star.
PRICE LEVEL
INTEREST RATE (Percent)
4.5
4.0
3.5
1.5
1.0
0.5
0
Money Demand
0.1
Money Supply
0,2
0.3 0.4
0.5
MONEY (Trillions of dollars)
0.0 0.7
0.8
A
New MS Curve
OUTPUT
+
New Equilibrium
Suppose the central bank announces that it is lowering its target interest rate by 75 basis points, or 0.75 percentage point. To do this, the central
bank will use open-market operations to
▼ the
money by
Y 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 central bank's policy of targeting a lower 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.
Shift the curve on the graph to show the general impact of the central bank's new interest rate target on aggregate demand
Aggregate Demand
O
Aggregate Demand
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