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3. Changes in the money supply 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 4% and a quantity of money equal to $0.4 trillion, designated on the graph by the grey star symbol. : : : : : : : 60 45 25 20 0 Money Demand at Money Supply 06 62 03 04 65 MONEY (Tions of dollars) 67 08 OUTPUT 9 New MS Curve Suppose the Fed announces that it is lowering its target interest rate by 75 basis points, or 0.75 percentage points. To do this, the Fed will use open- market operations to the money by the public. Apoge Demand ++ New Equilibrium Use the green line (triangle symbol) on the previous graph to illustrate the effects of this policy by placing the new money supply ourve (HS) 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 lower interest rate will the cost of borrowing, causing residential and business investment spending to demanded to at each price level. and the quantity of output Shift the curve on the graph to show the general impact of the Fed's new interest rate target on aggregate demand 10 Aggregele Demand

3. Changes in the money supply 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 4% and a quantity of money equal to $0.4 trillion, designated on the graph by the grey star symbol. : : : : : : : 60 45 25 20 0 Money Demand at Money Supply 06 62 03 04 65 MONEY (Tions of dollars) 67 08 OUTPUT 9 New MS Curve Suppose the Fed announces that it is lowering its target interest rate by 75 basis points, or 0.75 percentage points. To do this, the Fed will use open- market operations to the money by the public. Apoge Demand ++ New Equilibrium Use the green line (triangle symbol) on the previous graph to illustrate the effects of this policy by placing the new money supply ourve (HS) 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 lower interest rate will the cost of borrowing, causing residential and business investment spending to demanded to at each price level. and the quantity of output Shift the curve on the graph to show the general impact of the Fed's new interest rate target on aggregate demand 10 Aggregele Demand

Principles of Economics (MindTap Course List)
Principles of Economics (MindTap Course List)
8th Edition
ISBN:9781305585126
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter34: The Influence Of Monetary And Fiscal Policy On Aggregate Demand
Section: Chapter Questions
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3. Changes in the money supply 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 4% and a quantity of money equal to $0.4 trillion, designated on the graph by the grey star symbol. 60 5.5 50 4.5 40 35 30 20 0 Money Demand Money Supply 04 02 03 af 0.5 06 MONEY (Trillions of dollars) demanded to 67 08 -1 OUTPUT New MS Curve Suppose the Fed announces that it is lowering its target interest rate by 75 basis points, or 0.75 percentage points. 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. Appoge Demand New Equilibrium will Suppose the following graph shows the aggregate demand curve for this economy. The Fed's policy of targeting a lower interest rate the cost of borrowing, causing residential and business investment spending to at each price level. and the quantity of output Shift the curve on the graph to show the general impact of the Fed's new interest rate target on aggregate demand Aggregale Demand
Transcribed Image Text:3. Changes in the money supply 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 4% and a quantity of money equal to $0.4 trillion, designated on the graph by the grey star symbol. 60 5.5 50 4.5 40 35 30 20 0 Money Demand Money Supply 04 02 03 af 0.5 06 MONEY (Trillions of dollars) demanded to 67 08 -1 OUTPUT New MS Curve Suppose the Fed announces that it is lowering its target interest rate by 75 basis points, or 0.75 percentage points. 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. Appoge Demand New Equilibrium will Suppose the following graph shows the aggregate demand curve for this economy. The Fed's policy of targeting a lower interest rate the cost of borrowing, causing residential and business investment spending to at each price level. and the quantity of output Shift the curve on the graph to show the general impact of the Fed's new interest rate target on aggregate demand Aggregale Demand
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