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 3.5% and a quantity of money equal to $0.4 trillion, designated on the graph by the grey star symbol. 5.5 A 5.0 New MS Curve Money Demand 4.5 4.0 New Equilibrium 3.5 INTEREST RATE (Percent 3.0 2.5 2.0 Money Supply 1.5 0 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 points. To do this, the Fed will use open market operations to v the 7 money by v 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 V the cost of borrowing, causing residential and business investment spending to V and the quantity of output demanded to V at each price level. Suppose the Fed announces that it is raising its target interest rate by 50 basis points, or 0.5 percentage points. To do this, the Fed will use open market operations to V the V money by V the public. Use the green line (t - oi) on the previous graph to illustrate the effects of this policy by placing the new money supply curve (MS) in the increase correct location. Plac. oint (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 V the cost of borrowing, causing residential and business investment spending to V and the quantity of output demanded to V at each price level. Suppose the Fed announces that it is raising its target interest rate by 50 basis points, or 0.5 percentage points. To do this, the Fed will use open market operations to V the V money by V the public. supply of Use the green line (triangle symbol) on t - =ph to illustrate the effects of this policy by placing the new money supply curve (MS) in the demand for correct location. Place the black point (pl he 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 V the cost of borrowing, causing residential and business investment spending to V and the quantity of output demanded to V 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. Suppose the Fed announces that it is raising its target interest rate by 50 basis points, or 0.5 percentage points. To do this, the Fed will use open market operations to v the v money by V the public. selling bonds to Use the green line (triangle symbol) on the previous graph to illustrat. icy by placing the new money supply curve (MS) in the buying bonds from correct location. Place the black paint (plus symbol) at the new equilib 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 V the cost of borrowing, causing residential and business investment spending to v and the quantity of output demanded to V 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. 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 V the cost of borrowing, causing residential and business investment spending to V and the quantity of output demanded to V at each price level. reduce 'nc ease ' ve on the graph to show the general impact of the Fed's new interest rate target on aggregate demand. 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 paint (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 V the cost of borrowing, causing residential and business investment spending to v and the quantity of output demanded to increase V at each price level. d ecrease demand. Shift the curve on the graph to show the general impact of the Fed's new interest rate target 0 Suppose the following graph shows the aggregate demand curve for this economy. The Fed's policy of targeting a higher interest rate will V the cost of borrowing, causing residential and business investment spending to Y and the quantity of output demanded to V at each price level. ve on the graph to show the general impact of the Fed's new interest rate target on aggregate demand. @ increase decrease Shift the curve on the graph to show the general impact of the Fed's new interest rate target on aggregate demand. O Aggregate Demand PRICE LEVEL Aggregate Demand OUTPUT