4 Targeting the money supply or the interest rate The following graph shows an increase in the demand for money from 2013 (MD2013MD2013) to 2014 (MD2014MD2014) caused by an increase in the price level The initial equilibrium interest rate in 2013 was Now suppose the Bank of Canada chooses not to alter the money supply between 2013 and 2014 On the following graph, use the grey point (star symbol) to illustrate the equilibrium interest rate and quantity of money that would result from this lack of intervention No InterventionNew MS CurveWith Intervention0 91 01 11 21 31 41 56 506 256 005 755 505 255 004 754 50NOMINAL INTEREST RATE (Percent)QUANTITY OF MONEY (Trillions of dollars)MD2013MD2014Money Supply Suppose the Bank of Canada wants to keep 2014 interest rates at their 2013 level On the previous graph, place the green line (triangle symbol) to indicate the new money supply curve if the Bank of Canada follows this policy Then use the black point (plus symbol) to indicate the equilibrium interest rate and quantity of money in this case In partly because most central banks set monetary policy aimed at targeting a specific

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4  Targeting the money supply or the interest rate The following graph shows an increase in the demand for money from 2013 (MD2013MD2013) to 2014 (MD2014MD2014) caused by an increase in the price level  The initial equilibrium interest rate in 2013 was  Now suppose the Bank of Canada chooses not to alter the money supply between 2013 and 2014  On the following graph, use the grey point (star symbol) to illustrate the equilibrium interest rate and quantity of money that would result from this lack of intervention  No InterventionNew MS CurveWith Intervention0 91 01 11 21 31 41 56 506 256 005 755 505 255 004 754 50NOMINAL INTEREST RATE (Percent)QUANTITY OF MONEY (Trillions of dollars)MD2013MD2014Money Supply Suppose the Bank of Canada wants to keep 2014 interest rates at their 2013 level  On the previous graph, place the green line (triangle symbol) to indicate the new money supply curve if the Bank of Canada follows this policy  Then use the black point (plus symbol) to indicate the equilibrium interest rate and quantity of money in this case  In partly because most central banks set monetary policy aimed at targeting a specific

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4. Targeting the money supply or the interest rate The following graph shows an increase in the demand for money from 2013 (MD2013MD2013) to 2014

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