Suppose the federal Reserve shifts to a contractionary monetary policy by shilli

Question

Suppose the federal Reserve shifts to a contractionary monetary policy by shilling bords through open-market operations. Assume that this policy is unanticipated. This problem will wort through me short-run effects of two move. The following graph shows the money demand and money supply curves. Show the effect of the fed's contract ternary monetary policy by shifting one or both of the curves. (Ignore any potential feedback effects.) As a result of the Fed's policy, the interest rate to. Tod tip: click and drag one or both of the curves. Curves will snap Into position, so if you try to move the curve and it snaps back to Its original position, just and drag It a title farther.

Explanation / Answer

Shift the money supply curve or the vertical orange line in the diagram to left, as the selling of bonds will decrease the money supply in the economy.

Thus, interest rate will rise and will be higher than 9 per cent. The amount of the increase in the interest rate will be known once you will shift the money supply curve. The new interest rate will be determined at the point where new money supply curve and initial money demand curve intersect.

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