Transcribed Image Text:?
The following graph represents the money market in a hypothetical economy. As in the United States, this economy has a central bank called the Fed,
but unlike in the United States, the economy is closed (that is, the economy does not interact with other economies in the world). The money market
is currently in equilibrium at an interest rate of 5% and a quantity of money equal to $0.4 trillion, as indicated by the grey star.
INTEREST RATE (Percent)
7.0
6.5
6.0
5.5
5.0
4.5
4.0
3.5
3.0
0
Money Demand
0.1
Money Supply
0.2 0.3 04
0.5
MONEY (Trillions of dollars)
0.6
0.7
0.8
14
New MS Curve
+
New Equilibrium
Suppose the Fed announces that it is lowering its target interest rate by 25 basis points, or 0.25 percentage point. To do this, the Fed will use open-
market operations to
money by
the public.
the
The following graph represents the money market in a hypothetical economy. As in the United States, this economy has a central bank called the Fed,
but unlike in the United States, the economy is closed (that is, the economy does not interact with other economies in the world). The money market
is currently in equilibrium at an interest rate of 5% and a quantity of money equal to $0.4 trillion, as indicated by the grey star.
INTEREST RATE (Percent)
7.0
6.5
6.0
5.5
5.0
4.5
4.0
3.5
3.0
0
Money Demand
0.1
Money Supply
0.2 0.3 04
0.5
MONEY (Trillions of dollars)
0.6
0.7
0.8
14
New MS Curve
+
New Equilibrium
Suppose the Fed announces that it is lowering its target interest rate by 25 basis points, or 0.25 percentage point. To do this, the Fed will use open-
market operations to
money by
the public.
the
