4. Changes in the money supply Suppose the following graph shows the aggregate demand curve for this economy. The Fed's policy of targeting a lower interest rate willthe cost of borrowing, causing residential and business investment spending toand the quantity of output demanded toat 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.PRICE LEVELOUTPUTAggregate DemandOAggregate Demand 4. Changes in the money supplyThe following graph represents the money market for some hypothetical economy. This economy is similar to the United States in the sense that it hasa central bank called the Fed, but a major difference is that this economy is closed (and therefore does not have any interaction with other worldeconomies). The money market is currently in equilibrium at an interest rate of 2.5% and a quantity of money equal to $0.4 trillion, designated on thegraph by the grey star symbol.INTEREST RATE (Percent)4.54.03.53.02.5201.51.00.5Money Demand00.10.2Money Supply0.40.50.3MONEY (Trillions of dollars)0.60.70.8=New MS CurveNew EquilibriumSuppose the Fed announces that it is lowering its target interest rate by 75 basis points, or 0.75 percentage points. To do this, the Fed will use open-market operations tothemoney bythe public.Use the green line (triangle symbol) on the previous graph to illustrate the effects of this policy by placing the new money supply curve (MS) in thecorrect location. Place the black point (plus symbol) at the new equilibrium interest rate and quantity of money.

Central bank of a nation controls the money supply in the economy. A change in money supply changes…

Suppose the following graph shows the aggregate demand curve for this economy. The Fed's policy of targeting a lower interest rate will and the quantity of output demanded to the cost of borrowing, causing residential and business investment spending 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.