Question

1. equilibrium and disequilibrium in the money market

the following diagram represents the money market in the united states, which is currently in equilibrium, as indicated by the gray star.
suppose the federal reserve (the fed) announces that it is raising its target interest rate by 50 basis points, or 0.50%. it would achieve this by decreasing the money demand. use the green line (triangle symbols) on the preceding graph to illustrate the effects of this policy. place the black point (plus symbol) on the graph to indicate the new equilibrium interest rate and quantity of money.
the sequence of events that results in a new equilibrium interest rate, after the fed makes the change you selected, may be described as follows: because there is less money in the financial system, the quantity of money demanded decreases, which means that bond issuers must raise the interest they pay to sell bonds. this process continues until the new equilibrium interest rate is achieved.

Explanation:

Step1: Analyze Fed's Policy Impact

To raise the target interest rate, the Fed decreases the money supply (shifts the vertical money supply curve left). This creates a shortage at the original interest rate, so people sell bonds, driving bond prices down and interest rates up. The money demand curve is downward - sloping, so as interest rates rise, the quantity of money demanded decreases until a new equilibrium is reached where the new (left - shifted) money supply curve intersects the money demand curve.

Step2: Illustrate on the Graph

• New Curve (Money Supply): Move the green line (triangle symbols) to the left of the original money supply curve (since the Fed decreases the money supply). For example, if the original money supply was at 1.0 trillion dollars, the new money supply curve could be at 0.9 trillion dollars (depending on the scale, but the key is a leftward shift).
• New Equilibrium: The black point (plus symbol) should be at the intersection of the new money supply curve and the money demand curve. As the money supply decreases, the equilibrium interest rate rises (above 4.0%) and the equilibrium quantity of money decreases (below 1.0 trillion dollars). The sequence of events: Less money in the system leads to less money demanded (as interest rates rise), so bond issuers must raise interest to attract buyers (to sell bonds), until the new equilibrium interest rate (higher) and quantity of money (lower) are achieved.

Answer:

To solve the problem:

1. New Curve (Money Supply): Shift the green line (triangle symbols) to the left (decrease in money supply).
2. New Equilibrium: Place the black point (plus symbol) at the intersection of the new (left - shifted) money supply curve and the money demand curve, with a higher interest rate and lower quantity of money than the original equilibrium (interest rate > 4.0%, quantity of money < 1.0 trillion dollars). The sequence of events: Because there is less money in the financial system, the quantity of money demanded decreases, which means that bond issuers must raise the interest they pay to attract buyers to sell bonds.