Question

Changes in the money supply 

The following graph represents the money market in a hypothetical economy. As in the United States, this economy has a central bank called the Fede 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 Currently in equilibrium at an interest rate of 4.5% and a quantity of money equal to $ 0.4 trillion, as indicated by the grey star.

Suppose the Fed announces that it is lowering its target interest rate by 75 basis points, or 0.75 percentage point. To do this, the Fed will use open- market operations to money by the 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 the correct 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 will the cost of borrowing, causing residential and business Investment spending to and the quantity of output demanded to at each price level. 

Shure the curve on the graph to show the general impact of the Fed's new interest rate target on aggregate demand. 

Answer 1

Decrease in Interest rate will increase in money supply which leads to increase in consumer and business spending so Aggegate output will increase which leads to shift in AD curve to right side.