Chapter 15, Problem 1.2P

To determine

To explain:The way in which the supply and the demand for money determines the rate of interest, and the shapes of the supply curve and the demand curve with the help of a diagram.

Concept Introduction:

The Federal Reserve manages the supply of the money and money aggregates in the economy. They increase money supply to stimulate output and employment in the economy. However, an increase in money supply also affects the price level in the economy. The Fed does this through open market purchase of U.S. government securities or by printing money. This increase in money supply results with a decrease in the interest rates. However, such money supply has major effect on the real GDP, the potential output in the economy, and the price levels.