3. The effect of changes in the money supply The following diagram represents the money market in the United States, which is currently in equilibrium, as indicated by the grey star. INTEREST RATE (Percent) 60 5.5 Money Demand 5.0 4.5 4.0 3.5 3.0 + 2.5 20+ 0.6 07 Money Supply 0.9 1.0 1.1 1.2 0.8 QUANTITY OF MONEY (Trillions of dollars) 1.3 A New Curve New Equilibrium ? Suppose the Federal Reserve (the Fed) announces that it is raising its target interest rate by 50 basis points, or 0.50%. It would achieve this by Use the green line (triangle symbols) on the preceding graph to illustrate the effects of this policy. Place the the black point (plus symbol) on the graph to indicate the new equilibrium interest rate and quantity of money. The sequence of events that results in a new equilibrium interest rate, after the Fed makes the change you selected, may be described as follows: Because there is money in the financial system, there is an excess money at the initial equilibrium interest rate. Individuals and the interest rate This process and businesses adjust their asset portfolios by bonds. As a result, the price of bonds continues until the new equilibrium interest rate is achieved.

3. The effect of changes in the money supply The following diagram represents the money market in the United States, which is currently in equilibrium, as indicated by the grey star. INTEREST RATE (Percent) 60 5.5 Money Demand 5.0 4.5 4.0 3.5 3.0 + 2.5 20+ 0.6 07 Money Supply 0.9 1.0 1.1 1.2 0.8 QUANTITY OF MONEY (Trillions of dollars) 1.3 A New Curve New Equilibrium ? Suppose the Federal Reserve (the Fed) announces that it is raising its target interest rate by 50 basis points, or 0.50%. It would achieve this by Use the green line (triangle symbols) on the preceding graph to illustrate the effects of this policy. Place the the black point (plus symbol) on the graph to indicate the new equilibrium interest rate and quantity of money. The sequence of events that results in a new equilibrium interest rate, after the Fed makes the change you selected, may be described as follows: Because there is money in the financial system, there is an excess money at the initial equilibrium interest rate. Individuals and the interest rate This process and businesses adjust their asset portfolios by bonds. As a result, the price of bonds continues until the new equilibrium interest rate is achieved.

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter21: The Monetary System

Section: Chapter Questions

Problem 10PA

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