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

2. Equilibrium and disequilibrium in the money market
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 lowering its target interest rate by 50 basis points, or 0.50%. 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 _______ money in the financial system, the quantity of interest-bearing financial assets (such as bonds) demanded _______ , which means that bond issuers _______ sell bonds. This process continues until the new equilibrium interest rate is achieved.

Answers in the bank:

1st blank: Increasing, Decreasing

2nd: Money Supply, Money Demand

3rd: Less, More

4th: Decreases, Increases

5th:Must raise the interest they pay to, can issue bonds at lower interest rates and still

Solutions

Expert Solution

Rahul Sunny answered 2 years ago

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