5. Changes in the money supply

The following graph represents the money market in a hypothetical economy. As in the United States, this economy has a central bank called the Fed, but unlike in the United States, the economy is closed (that is, the economy does not interact with other economies in the world). The money market is currently in equilibrium at an interest rate of 5.5% and a quantity of money equal to $0.4 trillion, as indicated by the grey star.

O Aggregate Demand PRICE LEVEL Aggregate Demand OUTPUTINTEREST RATE (Percent) 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 Money Demand 0.1 0.2 0.3 0.4 0.5 0.6 MONEY (Trillions of dollars) 0.7 0.8 + New MS Curve - -|- New Equilibrium