Question

On March 15, 2017, Federal Reserve Chairman Janet L. Yellen announced the Federal Reserve was raising its benchmark rate (the federal funds rate) by a quarter of a percentage point (to a range of 0.75-1.00 percent). This was the third time the Fed has raised rates after the Great Recession. Consider the market for money illustrated in the figure below. Assume the market initially just prior to March 15, 2017) is in equilibrium at point A. Describe the effects of the Fed's actions on the market for money. MS: Interest Rate, i MD: Mi Quantity of Money, M (billions of dollars)

Answer 1

Ans 1=option 4=Rates of interest will increase

When the central bank increases rates, it is called as a contractionary monetary strategy. A greater fed funds rate implies that banks are less able to borrow funds to keep their reserves at the required level. As an outcome, they lend less funds out. The funds they do lend will be at a greater rate as they’re borrowing money at a greater fed funds rate. As loans are tougher to get & costlier, firms will borrow less . This will decelerate the economy.

When this occurs, adjustable-rate mortgages become costlier. House purchasers can only afford smaller loans, thus holding back the realty sector. Realty prices fall. Property holders have less equity in their properties & feel worse off. They spend less, thus further decelerating the economy

Ans 2=option 4-money supply curve will move rightwards

Ans 3=option 3=AD curve will move rightwards