Suppose the graph that follows represents the money market in the United States.

Question

Suppose the graph that follows represents the money market in the United States. Assume the money market is currently in equilibrium, as indicated by the grey point (star symbol)

1. decreasing/increasing

2. money supply/money demand

3. purchase/sale

1. decreases/increases

Suppose the graph that follows represents the money market in the United States. Assume the money market is currently in equilibrium, as indicated by the grey point (star symbol INTEREST RATE (Percent] 6.0 New Curve Money Supply 5.5 5.0 New Equilibrium 4.5 4.0 Money Demand 3.5 3.0 2.5 2.0 0.6 0.7 0.8 0.9 1.0 1.1 1.2 1.3 1.4 MONEY (Trillions of dollars] Help Clear AlL Now suppose the Federal Reserve (the Fed) announces that it is lowering its target rate by 0.50%. It can achieve this result by to illustrate the effects of this policy. Place the black point (X symbol) at the new equilibrium interest rate and quantity of money. A dashed drop line will automatically extend to the Y-axis the . Place the green line (triangle symbols) on the previous graph In carrying out monetary policy to change the interest rate as just described, the Fed makes an open-market of government bonds.

Explanation / Answer

Ans:

1) Increasing

2) Money supply

3) Purchase

The target rate is the interest rate charged by one depository institution for the overnight sale of balances to another depository institution.If the target rate need to be lowered it is achieved by increasing the money supply.

4) Consumer durables - Decreases

Plant and equipment - Increases

New housing - Increases

5) Increases

A fall in the interest rate will cause aggregate expenditure to increase and the aggregate expenditure curve will shift to the left and the real GDP increases.

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