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3. How the Fed Influences the money supply Which of the following are ways that the Federal Reserve influences the U.S. economy through its monetary

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3. How the Fed Influences the money supply Which of the following are ways that the Federal Reserve influences the U.S. economy through its monetary policies? Check all that apply Using open-market operations to buy securities, the Fed can decrease the money supply, thereby decreasing interest rates and subsequently increasing the rate of inflation. Using open-market operations to sell securities, the Fed can decrease the money supply, thereby increasing interest rates, which would Cause security prices to decrease. The Fed can decrease the Fed funds rate in an attempt to stimulate the economy Using open-market operations to buy securities, the Fed can increase the money supply, thereby increasing interest rates, which would cause security prices to decrease. The following graphs represent (1) The Money Market and (2) The Aggregate Supply and Aggregate Demand within the U.S. economy. The money market shows how the nominal Interest rate fluctuates to make the amount of money that people want to hold equal to the money supply. The demand curve shows the relationship between the quantity of money demanded and interest rates, and it's downward sloping because this is an Inverse relationship. As interest rates increase, people would prefer to invest their financial assets, decreasing the quantity of money demanded. As Interest rates decrease, people may be more willing to hold their financial assets as cash or bank deposits and borrow, increasing the quantity of money demanded. The money supply shows the relationship between the amount of money supplied and interest rates, and is vertical because money creation changes interest rates, however it is not being done in response to interest rates. And so, the money supply is Independent of interest rates, which gives it the vertical shape. The aggregate supply and aggregate demand model shows the relationship between changes in real gross domestic product and changes in the price level (inflation). The aggregate demand curve shows the relationship between the price level and the total amount of money spent on those goods and services. It is downward sloping because this is an inverse relationship. As the price level increases, the amount of goods and services demanded will decrease. As the price level decreases, the amount of goods and services demanded will increase. The components that make up real GDP are: Consumer Spending (C), Business Investment (I), Government Expenditures (G), and Net Exports (X-M). The aggregate supply curve shows the relationship between the price level and the total amount of output firms will sell. It is upward sloping because this is a positive relationship. As the price level increases, the amount of goods and services sold will increase. As the price level decreases, the amount of goods and services sold will decrease 12) Money Market Aggregate Supply and Aggregate Demand Supply AS INTEREST RATE (Percent) PRICE LEVEL AD Demand QUANTITY OF MONEY REAL GROSS DOMESTIC PRODUCT Suppose the FOMC's policy directive Instructs the Trading Desk at the New York Fed to decrease the federal funds rate because the U.S. economy is experiencing a recession, and the FOMC wants to stimulate spending in the economy. If the FOMC wants to decrease the Fed funds rate, then the Trading Desk traders will government securities. This results in a shift of the money supply curve to the and so there will be an) in interest rates. As a result, consumers will purchase and and businesses will invest Consequently, the aggregate demand curve will shift to the right, which shows that the economy has been successfully stimulated SVO sk at the New York Fed to decrease the federal funds rate -pending in the economy. Trading Desk traders will government sec a(n) in int As a result, consum Ely, the aggregate demand purchase ift to the right, which sell Grade It Now MacBook Air QUANTITY OF MONEY ose the FOMC's policy directive instructs the Trading Desk at the New York Fed eriencing a recession, and th right wants to stimulate spending in the economy left ne FOMC wants to decrease funds rate, then the Trading Desk traders will money supply curve to the and so there will be an) in int and businesses will invest Consequently, the aggregate demand a en successfully stimulated. ve MacBook Air 80 F3 DOO DOD F4 F5 $ F6 F7 4 % 5 ^ 6 & 7 REAL GROSS DOMI e instructs the Trading Desk at the New York Fed to decrease the f FOMC wants to stimulate spend decrease conomy. increase e Fed funds rate, then the Tradi bers will , and so there will be a(n) in interest rates. As a invest Consequently, the aggregate demand curve will shift to MacBook Air se the federal funds rate because the U.S. economy is more less government securities. This result hift of rates. As a result, consumers will purchase and will shift to the right, which shows that the economy has Grade It Now Save & Continue Suppose the FOMC's policy directive instructs the experiencing a recession, and the FOMC wants to less If the the m ants to decrease the Fed funds rate, more pply curve to the and so there save and businesses will invest been successfully stimulated. . Con FOMC's policy directive instructs the Trading Desk at the New ga recession, and the FOMC wants to stimulate spending in the less wants to decrease the Fed f supply curve to the and businesses will invest essfully stimulated. a e, then the Trading Desk trac more ere will be a(n) Consequently, the aggregate a MacBook

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