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PRICE LEVEL INTEREST RATE (Percent) 0 30 80 Ο 90 120 INVESTMENT (Billions of dollars) 150 180 The following graph shows the aggregate demand (AD) and aggregate supply (AS) curves in the goods and services market before the Fed implements its contractionary policy. Illustrate the effect of the change in investment demand you illustrated on the graph by shifting the appropriate curve on the graph. REAL GDP (Trillions of dollars) AD AS AD -0- AS Fill in the blanks to interpret the effect of the Fed's policy. When the Fed sells bonds, the amount of money in circulation in the economy businesses to invest This drives interest rates which causes demand, in capital improvements such as new factories and upgraded equipment. The result is in the equilibrium price level, and in aggregate ▼in the equilibrium level of real GDP.

PRICE LEVEL INTEREST RATE (Percent) 0 30 80 Ο 90 120 INVESTMENT (Billions of dollars) 150 180 The following graph shows the aggregate demand (AD) and aggregate supply (AS) curves in the goods and services market before the Fed implements its contractionary policy. Illustrate the effect of the change in investment demand you illustrated on the graph by shifting the appropriate curve on the graph. REAL GDP (Trillions of dollars) AD AS AD -0- AS Fill in the blanks to interpret the effect of the Fed's policy. When the Fed sells bonds, the amount of money in circulation in the economy businesses to invest This drives interest rates which causes demand, in capital improvements such as new factories and upgraded equipment. The result is in the equilibrium price level, and in aggregate ▼in the equilibrium level of real GDP.

ECON MACRO
ECON MACRO
5th Edition
ISBN:9781337000529
Author:William A. McEachern
Publisher:William A. McEachern
Chapter15: Monetary Theory And Policy
Section: Chapter Questions
Problem 2.5P
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INTEREST RATE (Percent) 4. The effect of monetary policy on aggregate demand Suppose the Federal Reserve ("the Fed") shifts to a contractionary monetary policy by selling bonds through open-market operations. Assume that this policy is unanticipated. This problem will work through the short-run effects of this move. The following graph shows the money demand and money supply curves. Show the effect of the Fed's contractionary monetary policy by shifting one or both of the curves, and ignore any potential feedback effects. As a result of the Fed's policy, the interest rate to INTEREST RATE (Percent) 0 ° 300 600 Money Supply Money Demand -0- Money Supply 900 1200 Money Demand 1500 1800 QUANTITY OF MONEY (Billions of dollars) The following graph shows the demand for investment. Show the short-run effect of the Fed's contractionary monetary policy by shifting the curve or moving the point along the curve. Again, ignore any potential feedback effects. Be sure the new interest rate corresponds to the interest rate you have on the top graph. n 30 90 120 150 180 INVESTMENT (Billions of dollars)
Transcribed Image Text:INTEREST RATE (Percent) 4. The effect of monetary policy on aggregate demand Suppose the Federal Reserve ("the Fed") shifts to a contractionary monetary policy by selling bonds through open-market operations. Assume that this policy is unanticipated. This problem will work through the short-run effects of this move. The following graph shows the money demand and money supply curves. Show the effect of the Fed's contractionary monetary policy by shifting one or both of the curves, and ignore any potential feedback effects. As a result of the Fed's policy, the interest rate to INTEREST RATE (Percent) 0 ° 300 600 Money Supply Money Demand -0- Money Supply 900 1200 Money Demand 1500 1800 QUANTITY OF MONEY (Billions of dollars) The following graph shows the demand for investment. Show the short-run effect of the Fed's contractionary monetary policy by shifting the curve or moving the point along the curve. Again, ignore any potential feedback effects. Be sure the new interest rate corresponds to the interest rate you have on the top graph. n 30 90 120 150 180 INVESTMENT (Billions of dollars)
PRICE LEVEL INTEREST RATE (Percent) on the top graph. 30 80 90 0 120 INVESTMENT (Billions of dollars) 150 180 The following graph shows the aggregate demand (AD) and aggregate supply (AS) curves in the goods and services market before the Fed implements its contractionary policy. Illustrate the effect of the change in investment demand you illustrated on the graph by shifting the appropriate curve on the graph. REAL GDP (Trillions of dollars) Fill in the blanks to interpret the effect of the Fed's policy. AD AS AD -- AS When the Fed sells bonds, the amount of money in circulation in the economy businesses to invest This drives interest rates which causes demand, in capital improvements such as new factories and upgraded equipment. The result is in the equilibrium price level, and in aggregate ▼in the equilibrium level of real GDP.
Transcribed Image Text:PRICE LEVEL INTEREST RATE (Percent) on the top graph. 30 80 90 0 120 INVESTMENT (Billions of dollars) 150 180 The following graph shows the aggregate demand (AD) and aggregate supply (AS) curves in the goods and services market before the Fed implements its contractionary policy. Illustrate the effect of the change in investment demand you illustrated on the graph by shifting the appropriate curve on the graph. REAL GDP (Trillions of dollars) Fill in the blanks to interpret the effect of the Fed's policy. AD AS AD -- AS When the Fed sells bonds, the amount of money in circulation in the economy businesses to invest This drives interest rates which causes demand, in capital improvements such as new factories and upgraded equipment. The result is in the equilibrium price level, and in aggregate ▼in the equilibrium level of real GDP.
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