Exhibit 16-3 Money market demand and supply curves

In Exhibit 16-3, assume an equilibrium with an interest rate of 15 percent and the money supply at $100 billion. The Fed uses its policy tools to move the economy to a new equilibrium at E₂ with money supply of $150 billion and an interest rate of 10 percent. This change could be the result of a(n) :

Question

Exhibit 16-3 Money market demand and supply curves

In Exhibit 16-3, assume an equilibrium with an interest rate of 15 percent and the money supply at $100 billion. The Fed uses its policy tools to move the economy to a new equilibrium at E₂ with money supply of $150 billion and an interest rate of 10 percent. This change could be the result of a(n) :

Quizplus · Accepted Answer

An open market purchase of securities by the Fed would increase the money supply, shifting the money supply curve to the right from MS to MS1 and lowering the interest rate from 15 percent to 10 percent, resulting in a new equilibrium at point E₂. A higher discount rate or higher required-reserve ratio would decrease the money supply, shifting the money supply curve to the left, and causing an increase in the interest rate, making E₂ an unlikely outcome. Therefore, the correct option is D.

Exhibit 16-3 Money Market Demand and Supply Curves