The following graph represents the money market for some hypothetical economy. This economy is similar to the United States in the sense that it has a central bank called the Fed, but a major difference is that this economy is closed (and therefore does not have any interaction with other world economies). The money market is currently in equilibrium at an interest rate of 3% and a quantity of money equal to $0.4 trillion, designated on the graph by the grey star symbol. Suppose the Fed announces that it is raising its target interest rate by 75 basis points, or 0.75 percentage points. the Fed will use open-market operations to __ the __ money by __ the public. Use the green line (triangle symbol) on the previous graph to illustrate the effects of this policy by placing the new money supply curve (MS) in the correct location. Place the black point (plus symbol) at the new equilibrium interest rate and quantity of money.

Suppose the following graph shows the aggregate demand curve for this economy. The Fed's policy of targeting a higher interest rate will ____the cost of borrowing, causing residential and business investment spending to ___and the quantity of output demanded to ___ at each price level.

3. Changes in the money supply The following graph represents the money market for some hypothetical economy. This economy is similar to the United States in the sense that it has a central bank called the Fed, but @ major difference is that this economy is closed (and therefore does not have any interaction with other world economies). The money market is currently in equilibrium at an interest rate of 3%t and a quantity of money equal to $0.4 trillion, designated on the graph by the grey star symbol. @ 50 o 45 New MS Curve Meney Demand 40 kL 23 New Equilibrium 30 e - - 25 INTEREST RATE (Percent) 20 Money Supply ] 0 01 02 03 04 05 08 o7 0 MONEY (Trillions of dollars) Suppose the Fed announces that it is raising its target interest rate by 75 basis points, or 0.75 percentage points. To do this, the Fed will use open- market operations to the money by the public. Use the green line (triangle symbol) on the previous graph to illustrate the effects of this policy by placing the new money supply curve (M5) in the correct location, Place the black point (plus symbol) at the new eguilibrium interest rate and quantity of money. Suppose the following graph shows the aggregate demand curve for this economy. The Fed's policy of targeting a higher interest rate will W the cost of borrowing, causing residential and business investment spending to w and the quantity of cutput demanded to at sach price level. Suppose the Fed announces that it is raising its target interest rate by 75 basis points, or 0.75 percentage points. To do this, the Fed will use open- market operations to the money by the public. Use the green line (triangle symbol) on the previous graph to illustrate the effects of this policy by placing the new money supply curve (MS) in the correct location. Place the black point (plus symbol) at the new equilibrium interest rate and quantity of money. Suppose the following graph shows the aggregate demand curve for this economy. The Fed's policy of targeting a higher interest rate will the cost of borrowing, causing residential and business investment spending to and the quantity of output demanded to at each price level. Shift the curve on the graph to show the general impact of the Fed's new interest rate target on aggregate demand. O Aggregate Demand PRICE LEVEL Aggregate Demand OUTPUT Grade It Now Save & Continue