Exhibit 20-3 Money market demand and supply curves

In Exhibit 20-3, 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 20-3 Money market demand and supply curves

In Exhibit 20-3, 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

The Fed conducted an open market purchase of securities, which increased the money supply and decreased the interest rate, shifting the demand and supply curves to E₂. Open market sale of securities, higher discount rate, and higher required-reserve ratio would decrease the money supply and increase the interest rate, shifting the demand and supply curves to a new equilibrium with a higher interest rate and a lower money supply.

Exhibit 20-3 Money Market Demand and Supply Curves