Suppose that the Federal Reserve sets the supply of money at $3 trillion and the money demand curve intersects the money supply curve at an interest rate of 5 percent.
a. Draw the money supply curve and money demand curve to illustrate the above money market equilibrium. Label the money supply curve and money demand curve with the equilibrium quantity of money and the interest rate.
b. What will happen to the equilibrium interest rate if, all else equal, the real GDP in the economy goes up? Justify your answer, and show the impact on the graph.
c. If the Federal Reserve wants the interest rate to return to 5 percent and wants to achieve this through open-market operations, then should it buy or sell Treasury securities? Show the impact of the open-market operations on the graph assuming that the interest rate returns to 5 percent.

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The Answer of Suppose that the Federal Reserve sets the supply of money at $3 trillion and the money demand curve intersects the money supply curve at an interest rate of 5 percent.
a. Draw the money supply curve and money demand curve to illustrate the above money market equilibrium. Label the money supply curve and money demand curve with the equilibrium quantity of money and the interest rate.
b. What will happen to the equilibrium interest rate if, all else equal, the real GDP in the economy goes up? Justify your answer, and show the impact on the graph.
c. If the Federal Reserve wants the interest rate to return to 5 percent and wants to achieve this through open-market operations, then should it buy or sell Treasury securities? Show the impact of the open-market operations on the graph assuming that the interest rate returns to 5 percent.

Suppose That the Federal Reserve Sets the Supply of Money