Suppose the Fed announces that it is lowering its target interest rate by 75 bas

Question

Suppose the Fed announces that it is lowering its target interest rate by 75 basis points, or 0.75 percentage point. To do this, the Fed will use open-market operations to ________ the _______money by _______ the public. Use the green line (triangle symbol) on the previous graph to illustrate the efforts of this policy by placing the new money supply curve (MS) in the correct location. Place the black point (plus symbol) at the new equilibrium interest rate and quantity of money. Suppose the following graph shows the aggregate demand curve for this economy. The Fed's policy of targeting a lower interest rate will ________ the cost of borrowing causing residential and business investment spending to ________ and the quantity of output demanded to ________ at each price level. Shift the curve on the graph to show the general impact of the Fed's new interest rate target on aggregate demand.

Explanation / Answer

Answers to First Three Blanks

to   increase the supply of money by not taxing   the public

Answers to the Second Three Blanks:

will reduce / decrease the cost of borrowing, causing residential and business investment spending to increase and the quantity of output demanded to increase at each price level.

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