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

An open market purchase of securities by the Fed increases the money supply, which shifts the money supply curve to the right. This leads to a decrease in the equilibrium interest rate, moving the economy to a new equilibrium at E₂ with a money supply of $150 billion and an interest rate of 10 percent. Options A, B, and C would all lead to a decrease in the money supply and an increase in the interest rate, which is the opposite of what is happening in this scenario.

Exhibit 20-3 Money Market Demand and Supply Curves