1. Suppose that the money market can be depicted in the graph below Interest rate (M/P)2 (M/P)⁰ (M³/P)¹ B C L3 L1 12 Quantity of Money LI is the original demand for money by the public and (M/P) is the real money supply. Assume that the price level does not change. The original equilibrium is at point O. Suppose that the Federal Reserve board lowered the reserve requirement for commercial banks. Briefly describe how you reached that conclusion. Identify the new equilibrium point and explain what happens to interest rates.

ENGR.ECONOMIC ANALYSIS
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Chapter1: Making Economics Decisions
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1. Suppose that the money market can be depicted in the graph below
Interest rate
(M/P)²
(M³/P)⁰ (M³/P)¹
G
K
A
O
B
C
O
E
L3
L1
12
Quantity of Money
LI is the original demand for money by the public and (M/P) is the real money supply. Assume that
the price level does not change. The original equilibrium is at point O.
Suppose that the Federal Reserve board lowered the reserve requirement for commercial banks.
Briefly describe how you reached that conclusion. (
Identify the new equilibrium point and explain what happens to interest rates.
Transcribed Image Text:1. Suppose that the money market can be depicted in the graph below Interest rate (M/P)² (M³/P)⁰ (M³/P)¹ G K A O B C O E L3 L1 12 Quantity of Money LI is the original demand for money by the public and (M/P) is the real money supply. Assume that the price level does not change. The original equilibrium is at point O. Suppose that the Federal Reserve board lowered the reserve requirement for commercial banks. Briefly describe how you reached that conclusion. ( Identify the new equilibrium point and explain what happens to interest rates.
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