3. The short-run effect of monetary policy on aggregate demand
Suppose the Federal Reserve implements a restrictive monetary policy by selling bonds through open-market operations. Assume that this policy is
unanticipated.
The following graph shows the money demand and money supply curves for the economy.
MONEY INTEREST RATE (Percent)
The Money Market
Money supply
Money demand
QUANTITY OF MONEY (Trillions of dollars)
Money demand
Money supply
Show the effect of the Fed's restrictive monetary policy by shifting one or both of the curves on the previous graph.
As a result of the Fed's policy, the money interest rate,
The following graph shows the market for loanable funds. For simplicity, the expected inflation rate is assumed to be zero, so the real interest rate
equals the money interest rate.
Show the short-run effect of the Fed's restrictive monetary policy by shifting either the demand or supply of loanable funds.