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 trllion, designated on the graph by the grey star symbol. 610 A 515 New MS Curve Money Demand 5.0 .+ 4.5 New Equilibrium 4.0 INTEREST RATE (Percent) 3.5 3.0 2.5 Money Supply 2.0 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 lowering its target interest rate by 75 basis points, or 0.75 percentage points. To do this, the Fed will use open- w the public. market operations to w the w money by Use the green line (triangle symbol) on the previous graph to illustrate the effects of this policy by placing the new money supply curve (M5) 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 w the cost of borrowing, causing residential and business investment spending to w and the guantity of output demanded to W at each price level. Shift the curve on the graph to show the general impact of the Fed's new interest rate target on sggregate demand. O Aggregate Demand PRICE LEVEL Aggregate Demand OUTPUT