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 sell securities, the Fed can increase the money supply, thereby increasing interest rates and subsequently reducing the rate of inflation. 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. 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 increase the Fed funds rate in an attempt to balance out inflationary pressure. 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. Use the graph to show what happens in the given scenario and to help answer the questions that follow. (Note: You will not be graded on any changes you make to the graph.) (1) INTEREST RATE (Percent) Money Market Supply Demand QUANTITY OF MONEY ? (2) PRICE LEVEL Aggregate supply and Aggregate Demand AS AD 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. government securities. This results in a shift of and in interest rates. As a result, consumers will purchase . Consequently, the aggregate demand curve will shift to the right, which shows that the If the FOMC wants to decrease the Fed funds rate, then the Trading Desk traders will the money supply curve to the, and so there will be a(n) and businesses will invest save economy has been successfully stimulated.