Changes in the money supplyThe following graph represents the money market for some hypothetical economy. This economy is similar to the United States in the sense that it haa 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 4% and a quantity of money equal to $0.4 trillion, designated on thegraph by the grey star symbol.INTEREST RATE (Percent)6.05.55.0454.0353.025200Money Demand0.1Money Supply0.2 03 0.4 0.5 0.6 0.7MONEY (Trillions of dollars)084New MS CurveNew EquilibriumⒸimage 1Suppose the Fed announces that it is lowering 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 lower interest rate willthe cost of borrowing, causing residential and business investment spending toat each price level.and the quantity of output demanded to Suppose the Fed announces that it is lowering its target interest rate by 75 basis points, or 0.75 percentage points. To do this, the Fed will use open-market operations tomoney bythe public.theUse 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 lower interest rate willthe cost of borrowing, causing residential and business investment spending 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.?PRICE LEVELOUTPUTAggregate Demandand the quantity of output demanded toAggregate Demandimage 2

Central bank of a nation controls the money supply in the economy. A change in money supply changes…

The following graph represents the money market for some hypothetical economy. This economy is similar to the United States in the sense that it ha 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 4% and a quantity of money equal to $0.4 trillion, designated on the graph by the grey star symbol. INTEREST RATE (Percent) 60 5.5 5.0 45 3.5 3.0 25 2.0 Money Demand 0 0.1 0.2 Money Supply 03 0.4 05 06 0.7 MONEY (Trillions of dollars) 0.8 4 New MS Curve .+ New Equilibrium ? image 1 Suppose the Fed announces that it is lowering 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.

The following graph represents the money market for some hypothetical economy. This economy is similar to the United States in the sense that it ha 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 4% and a quantity of money equal to $0.4 trillion, designated on the graph by the grey star symbol. INTEREST RATE (Percent) 60 5.5 5.0 45 3.5 3.0 25 2.0 Money Demand 0 0.1 0.2 Money Supply 03 0.4 05 06 0.7 MONEY (Trillions of dollars) 0.8 4 New MS Curve .+ New Equilibrium ? image 1 Suppose the Fed announces that it is lowering 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.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Briefly explain with the aid of two diagrams: one showing the money market and the second the Treasury bill market, how a Central bank conducts an expansionary open market operation in the money market. In your exposition, be careful to make clear the implications of the operation for the price of Treasury bills and the short-term rate of interest.
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INTEREST RATE (Percent) 3 6 Suppose the money market for some hypothetical economy is given by the following graph, which plots the money demand and money supply curves Assume the central bank in this economy (the Fed) fixes the quantity of money supplied. Suppose the price level decreases from 90 to 75. Shift the appropriate curve on the graph to show the impact of a decrease in the overall price level on the market for money. 18 Money Supply 15 12 0 0 10 20 30 Money Demand 40 50 60 MONEY (Billions of dollars) Money Demand Money Supply Ⓡ
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