3. Changes in the money supplyThe 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.

70 - o\\ 65 + New MS Curve &0 Money Demand 4 New Equilibrium INTEREST RATE (Percent) 30 4 { + Money Suppl o e 0.1 0.2 03 0.4 05 06 MONEY (Trillions of dollars) 0.7 0.8 Suppose the Fed announces that it is lowering its target interest rate by 25 basis points, or 0.25 percentage points. To do this, the Fed will use open- market operations to W the _money by W the public. e PHT L W Use the green line (triangle symbol) on the previous graph to illustrate the effects of this policy by placing the new mone 'y 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 lower interest rate will the cost of borrowing, causing residential and business investment spending to _and the quantity of output W at each price level. demanded to