Suppose that the Federal Reserve sets the supply of money at $2 trillion and the money demand curve intersects the money supply curve at an interest rate of 4 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 price level in the economy goes down?
c. The Federal Reserve wants the interest rate to return to 4 percent and wants to achieve this by changing the reserve requirement. Should it increase or decrease the reserve requirement? Explain your answer.

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The Answer of Suppose that the Federal Reserve sets the supply of money at $2 trillion and the money demand curve intersects the money supply curve at an interest rate of 4 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 price level in the economy goes down?
c. The Federal Reserve wants the interest rate to return to 4 percent and wants to achieve this by changing the reserve requirement. Should it increase or decrease the reserve requirement? Explain your answer.

Suppose That the Federal Reserve Sets the Supply of Money