Thefollowing graph represents the money market for some hypothetical economy. This economy is similar to the United States in the sense that it hasa central bank called the Fed, but a major difference is that this economy is closed (and therefore does not have any interaction with other worldeconomies). 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 thegraph by the grey star symbol.INTEREST RATE (Percent)5.04.03.53.02.52.01.51.00Money Demand0.1Money Supply0.50.2 0.3 0.4MONEY (Trillions of dollars)0.6 0.70.8New MS CurveNew Equilibrium?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 tothemoney bythe 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 thecorrect 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 willthe cost of borrowing, causing residential and business investment spending toand the quantity of output demanded toat 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. 1.51.000.1PRICE LEVELMoney Supply0.4 0.5 0.6MONEY (Trillions of dollars)+ +0.20.30.7Suppose 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 tothethe public.money byUse 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 thecorrect location. Place the black point (plus symbol) at the new equilibrium interest rate and quantity of money.0.8Suppose the following graph shows the aggregate demand curve for this economy. The Fed's policy of targeting a higher interest rate willthe cost of borrowing, causing residential and business investment spending toat each price level.and the quantity of output demanded toShift the curve on the graph to show the general impact of the Fed's new interest rate target on aggregate demand.OUTPUTAggregate DemandAggregate Demand

When the central bank decides to increase the target interest rate, it implements a contractionary…

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. INTEREST RATE (Percent) 5.0 4.5 3.0 2.5 2.0 1.5 1.0 0 Money Demand 0.1 Money Supply 0.2 0.3 0.4 MONEY (Trillions of dollars) 0.5 0.6 0.7 0.8 New MS Curve New Equilibrium ? 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

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter22: Inflation

Section: Chapter Questions

Problem 7SCQ: Go to this website (http://www.measuringworth.com/ppowerus/) for the Purchasing Power Calculator at...