4. The effect of monetary policy on aggregate demand Suppose the Federal Reserve ("the Fed") shifts to an expansionary monetary policy by buying bonds through open-market operations. Assume that this policy is unanticipated. This problem will work through the short-run effects of this move. The following graph shows the money demand and money supply curves. Show the effect of the Fed's expansionary monetary policy by shifting one or both of the curves, and ignore any potential feedback effects. As a result of the Fed's policy, the interest rate falls _ to 4% . 12 Money Supply O 10 Money Demand 8 Money Supply Show how to INTEREST RATE (Percent) 6 de graph V Money Demand N 300 600 900 1200 1500 1800 QUANTITY OF MONEY (Billions of dollars)The following graph shows the demand for investment. Show the short-run effect of the Fed's expansionary monetary policy by shifting the curve or moving the point along the curve. Again, ignore any potential feedback effects. Be sure the new interest rate corresponds to the interest rate you have on the top graph. 12 10 o - 9 Show has to 8 6 O INTEREST RATE (Percent) do the graph 0 30 60 120 150 180 INVESTMENT (Billions of dollars)The following graph shows the aggregate demand (AD) and aggregate supply (AS) curves in the goods and services market before the Fed implements its expansionary policy. Illustrate the effect of the change in investment demand you illustrated on the graph by shifting the appropriate curve on the graph. (? AS AD Show how to do AS PRICE LEVEL the graph AD REAL GDP (Trillions of dollars) Fill in the blanks to interpret the effect of the Fed's policy. increase/ decrease up/down When the Fed buys bonds, the amount of money in circulation in the economy . This drives interest rates , Which causes businesses to invest more/less in capital improvements such as new factories and upgraded equipment. The result is_ in increase/decrease aggregate demandincrease/decrease in the equilibrium price level, andincrease/decrease in the equilibrium level of real GDP