The following graph shows an increase in the demand for money from 2013 (MD2013) to 2014 (MD 2014) caused by an increase in aggregate output. 5.00% 5.25% 5.50% 5.75% 6.00% The initial equilibrium interest rate in 2013 was Suppose the Federal Reserve (the Fed) chooses not to alter the money supply between 2013 and 2014. On the following graph, use the grey point (star symbol) to indicate the equilibrium interest rate and quantity of money that would result from this lack of intervention. NOMINAL INTEREST RATE (Percent) 6.25 6.00 5.75 5.50 5.25 5.00 4.75 4.50 4.25 Money Supply 0.9 1.0 1.2 1.3 1.4 1.5 QUANTITY OF MONEY (Trillions of dollars) Because MD. B MD 2014 Suppose the Fed wants to keep 2014 interest rates at their 2013 level. 2013 ☆ No Intervention New MS Curve With Intervention ? A-rapidly increasing the money supply causes hyperin investment responds to changes in the interest rate markets prefer low inflation to stable interest rates On the previous graph, place the green line (triangle symbols) to indicate the new money supply curve if the Fed follows this policy. Then use the black point (plus symbol) to indicate the equilibrium interest rate and quantity of money in this case. A B-interest rate level of M1 level of M2 rate of growth in the money supply , most central banks set monetary policy aimed at targeting a specific
The following graph shows an increase in the demand for money from 2013 (MD2013) to 2014 (MD 2014) caused by an increase in aggregate output. 5.00% 5.25% 5.50% 5.75% 6.00% The initial equilibrium interest rate in 2013 was Suppose the Federal Reserve (the Fed) chooses not to alter the money supply between 2013 and 2014. On the following graph, use the grey point (star symbol) to indicate the equilibrium interest rate and quantity of money that would result from this lack of intervention. NOMINAL INTEREST RATE (Percent) 6.25 6.00 5.75 5.50 5.25 5.00 4.75 4.50 4.25 Money Supply 0.9 1.0 1.2 1.3 1.4 1.5 QUANTITY OF MONEY (Trillions of dollars) Because MD. B MD 2014 Suppose the Fed wants to keep 2014 interest rates at their 2013 level. 2013 ☆ No Intervention New MS Curve With Intervention ? A-rapidly increasing the money supply causes hyperin investment responds to changes in the interest rate markets prefer low inflation to stable interest rates On the previous graph, place the green line (triangle symbols) to indicate the new money supply curve if the Fed follows this policy. Then use the black point (plus symbol) to indicate the equilibrium interest rate and quantity of money in this case. A B-interest rate level of M1 level of M2 rate of growth in the money supply , most central banks set monetary policy aimed at targeting a specific
Chapter26: Monetary Policy
Section: Chapter Questions
Problem 4SQP
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Transcribed Image Text:The following graph shows an increase in the demand for money from 2013 (MD2013) to 2014 (MD2014) caused by an increase in aggregate output.
5.00%
5.25%
The initial equilibrium interest rate in 2013 was
Suppose the Federal Reserve (the Fed) chooses not to alter the money supply between 2013 and 2014.
On the following graph, use the grey point (star symbol) to indicate the equilibrium interest rate and quantity of money that would result from this
lack of intervention.
NOMINAL INTEREST RATE (Percent)
6.25
6.00
5.75
5.50
5.25
5.00
4.75
4.50
4.25
0.9
1.0
1.1
1.2
1.3
1.4
QUANTITY OF MONEY (Trillions of dollars)
Because
Money Supply
1.5
B
MD
MD
2013
Suppose the Fed wants to keep 2014 interest rates at their 2013 level.
2014
☆
No Intervention
New MS Curve
With Intervention
5.50%
5.75%
6.00%
?
A-rapidly increasing the money supply causes hyperinflati
investment responds to changes in the interest rate
markets prefer low inflation to stable interest rates
On the previous graph, place the green line (triangle symbols) to indicate the new money supply curve if the Fed follows this policy. Then use the
black point (plus symbol) to indicate the equilibrium interest rate and quantity of money in this case.
A
B-interest rate
level of M1
level of M2
rate of growth in the
money supply
, most central banks set monetary policy aimed at targeting a specific
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