Question

The following diagram represents the money market in the United States, which is currently in equilibrium, as indicated by the grey star 

Suppose the Federal Reserve (the Fed) announces that it is raising its target interest rate by 25 basis points, or 0.25%. It would achieve this by the .Use the green line (triangle symbols) on the preceding graph to illustrate the effects of this policy. Place the black point (plus symbol) on the graph to indicate the new equilibrium interest rate and quantity of money.

The sequence of events that results in a new equilibrium interest rate, after the Fed makes the change you selected, may be described as follows: Because there is Individuals and businesses adjust their asset portfolios by money in the financial system, there is an excess money at the initial equilibrium interest rate bonds. As a result, the price of bonds ,and the interest rate This process continues until the new equilibrium interest rate is achieved.

Answer 1

Suppose the Federal Reserve (the fed) announces that it is raising its target interest rate by 25 basis points or 0.25%. It would achieve this by decreasing the money supply.

The sequence of events that results in a new equilibrium interest rate, after the fed makes the change you selected, may be described as follows; because there is less money in the financial system, there is an excess demand of money at the initial equilibrium interest rate.

Individuals and businesses adjust their asset portfolios by selling bonds. As a result, the price of bonds falls and the interest rate rises. This process continues until the new equilibrium interest rate is achieved.