The following graph shows an increase in the demand for money from 2013 (MD2013
) to 2014 (MD2014
) caused by an increase in aggregate output.
The initial equilibrium interest rate in 2013 was .
Suppose the Federal Reserve (the Fed) chooses not to alter the money supply between 2013 and 2014.
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.
No Intervention
New MS Curve
With Intervention
0.9
1.0
1.1
1.2
1.3
1.4
1.5
6.50
6.25
6.00
5.75
5.50
5.25
5.00
4.75
4.50
NOMINAL INTEREST RATE (Percent)
QUANTITY OF MONEY (Trillions of dollars)
MD
2013
MD
2014
Money Supply
Suppose the Fed wants to keep 2014 interest rates at their 2013 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 , most central banks set monetary policy aimed at targeting a specific .