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3. Changes in the money supply The following graph represents the money market for some hypothetical economy. This economy is similar to the United States in the sense that it has 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 2.5% and a quantity of money equal to $0.4 trillion, designated on the graph by the grey star symbol. INTEREST RATE (Percent) 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 Money Demand 0.1 0.2 Money Supply 0.3 0.4 0.5 MONEY (Trillions of dollars) 0.6 0.7 0.8 ÷ New MS Curve ++ New Equilibrium (?) 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.

3. Changes in the money supply The following graph represents the money market for some hypothetical economy. This economy is similar to the United States in the sense that it has 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 2.5% and a quantity of money equal to $0.4 trillion, designated on the graph by the grey star symbol. INTEREST RATE (Percent) 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 Money Demand 0.1 0.2 Money Supply 0.3 0.4 0.5 MONEY (Trillions of dollars) 0.6 0.7 0.8 ÷ New MS Curve ++ New Equilibrium (?) 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.

Macroeconomics: Private and Public Choice (MindTap Course List)
Macroeconomics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN:9781305506756
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Chapter13: Money And The Banking System
Section: Chapter Questions
Problem 16CQ
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3. Changes in the money supply The following graph represents the money market for some hypothetical economy. This economy is similar to the United States in the sense that it has 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 2.5% and a quantity of money equal to $0.4 trillion, designated on the graph by the grey star symbol. INTEREST RATE (Percent) 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 Money Demand 0.1 Money Supply 0.3 0.4 0.5 MONEY (Trillions of dollars) 0.2 0.6 0.7 0.8 New MS Curve New Equilibrium ? 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.
Transcribed Image Text:3. Changes in the money supply The following graph represents the money market for some hypothetical economy. This economy is similar to the United States in the sense that it has 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 2.5% and a quantity of money equal to $0.4 trillion, designated on the graph by the grey star symbol. INTEREST RATE (Percent) 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 Money Demand 0.1 Money Supply 0.3 0.4 0.5 MONEY (Trillions of dollars) 0.2 0.6 0.7 0.8 New MS Curve New Equilibrium ? 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.
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