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 3.5% and a quantity of money equal to $0.4 trillion, as indicated by the grey star INTEREST RATE (Percent) 55 50 45 40 35 20 18 New MS Curve Money Demand Money Supply 08 67 MONEY (Trilions of dojars) ++ New Equilibrium Suppose the Fed announces that it is raising its target interest rate by 50 basis points, or 0.5 percentage point. To do this, the Fed will use open- market operations to 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 demanded to at each price level. and the quantity of output PRICE LEVEL Shift the curve on the graph to show the general impact of the Fed's new interest rate target on aggregate demand. OUTPUT Aggregge Demand Aggregate Demand Grade It Now Save & Continue