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 5% and a quantity of money equal to $0.4 trillion, designated on the graph by the grey star symbol. INTEREST RATE (P 70 45 . My Dad Money Supply 46 6.7 43 43 04 MONEY(TH) + New MS Curve ++ New qurum Suppose the Fed announces that it is raising its target interest rate by 25 basis points, or 0.25 percentage points. To do this, the Fed will use open- market operations to money by the public. Use the green line (triangle symbol) on the previous graph to ilustrate the effects of this policy by placing the new manay 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. Shift the curve on the graph to show the general impact of the Fed's new interest rate target on aggregate demand. Ⓡ
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 5% and a quantity of money equal to $0.4 trillion, designated on the graph by the grey star symbol. INTEREST RATE (P 70 45 . My Dad Money Supply 46 6.7 43 43 04 MONEY(TH) + New MS Curve ++ New qurum Suppose the Fed announces that it is raising its target interest rate by 25 basis points, or 0.25 percentage points. To do this, the Fed will use open- market operations to money by the public. Use the green line (triangle symbol) on the previous graph to ilustrate the effects of this policy by placing the new manay 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. Shift the curve on the graph to show the general impact of the Fed's new interest rate target on aggregate demand. Ⓡ
Chapter13: Monetary Policy
Section: Chapter Questions
Problem 10E
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Transcribed Image Text: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 5% and a quantity of money equal to $0.4 trillion, designated on the
graph by the grey star symbol.
INTEREST RATE (Percent)
7.0
4.5
35
20
PRICE LEVEL
Many Demand
0.1
Money Supply
MONEY (Trio of dollar)
0.7
New MS Curve
Suppose the Fed announces that it is raising its target interest rate by 25 basis points, or 0.25 percentage points. To do this, the Fed will use open-
market operations to
✓money by
the public.
New Equrum
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.
OUTPUT
Ⓒ
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
at each price level.
and the quantity of output demanded to
Shift the curve on the graph to show the general impact of the Fed's new interest rate target on aggregate demand.
Agile Demand
Aggle and
(?)
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