6. Targeting the money supply or interest rates The following graph shows an increase in the demand for money from 2020 (MD2020 to 2021 ( MD202) caused by an increase in aggregate output. The initial equilibrium interest rate in 2020 was Suppose the Federal Reserve (the Fed) chooses not to alter the money supply between 2020 and 2021. On the following graph, use the grey point (star symbol) to indicate the equilibrium interest rate and quantity of money that would result from this lack of intervention. NOMINAL INTEREST RATE (Percent) 6.50 Money Supply 6.25 6.00 5.75 5.50 5.25 5.00 4.75 4.50 0.9 1.0 1.1 1.2 1.3 14 1.5 QUANTITY OF MONEY (Trillions of dollars) MD 2021 MD 2020 No Intervention New MS Curve + With Intervention Suppose the Fed wants to keep 2021 interest rates at their 2020 level. On the previous graph, place the green line (triangle symbols) to indicate the new money supply curve if the Fed follows this policy. Then use the black point (plus symbol) to indicate the equilibrium interest rate and quantity of money in this case. Because set monetary policy aimed at targeting a specific most central banks
6. Targeting the money supply or interest rates The following graph shows an increase in the demand for money from 2020 (MD2020 to 2021 ( MD202) caused by an increase in aggregate output. The initial equilibrium interest rate in 2020 was Suppose the Federal Reserve (the Fed) chooses not to alter the money supply between 2020 and 2021. On the following graph, use the grey point (star symbol) to indicate the equilibrium interest rate and quantity of money that would result from this lack of intervention. NOMINAL INTEREST RATE (Percent) 6.50 Money Supply 6.25 6.00 5.75 5.50 5.25 5.00 4.75 4.50 0.9 1.0 1.1 1.2 1.3 14 1.5 QUANTITY OF MONEY (Trillions of dollars) MD 2021 MD 2020 No Intervention New MS Curve + With Intervention Suppose the Fed wants to keep 2021 interest rates at their 2020 level. On the previous graph, place the green line (triangle symbols) to indicate the new money supply curve if the Fed follows this policy. Then use the black point (plus symbol) to indicate the equilibrium interest rate and quantity of money in this case. Because set monetary policy aimed at targeting a specific most central banks
Principles of Economics (MindTap Course List)
8th Edition
ISBN:9781305585126
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter34: The Influence Of Monetary And Fiscal Policy On Aggregate Demand
Section: Chapter Questions
Problem 6PA
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Transcribed Image Text:6. Targeting the money supply or interest rates
The following graph shows an increase in the demand for money from 2020 (MD2020 to 2021 (
MD202) caused by an increase in aggregate output.
The initial equilibrium interest rate in 2020 was
Suppose the Federal Reserve (the Fed) chooses not to alter the money supply between 2020 and
2021.
On the following graph, use the grey point (star symbol) to indicate the equilibrium interest rate
and quantity of money that would result from this lack of intervention.
NOMINAL INTEREST RATE (Percent)
6.50
Money Supply
6.25
6.00
5.75
5.50
5.25
5.00
4.75
4.50
0.9
1.0
1.1
1.2
1.3
14
1.5
QUANTITY OF MONEY (Trillions of dollars)
MD
2021
MD
2020
No Intervention
New MS Curve
+
With Intervention
Suppose the Fed wants to keep 2021 interest rates at their 2020 level.
On the previous graph, place the green line (triangle symbols) to indicate the new money supply
curve if the Fed follows this policy. Then use the black point (plus symbol) to indicate the
equilibrium interest rate and quantity of money in this case.
Because
set monetary policy aimed at targeting a specific
most central banks
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