US money market: Assume the equilibrium interest rate is 2% and the money supply is set at $2Trillion.
(a) Build the US money market Graph; be sure to label all axes and the current equilibrium. Give a brief explanation for why each curve is sloped the way it is.
(b) Suppose the aggregate price level rises significantly this year. How would the money market be affected? Illustrate this change on the money market in a new graph. Label everything!
(c) Suppose the Fed were to make an open-market purchase of 200 million in US Treasury bonds. Is this a shift or a movement along a curve? Graph it.
(d)Based on your answer in part C. What happened to the interest rate? Why?(Explain in detail using the theory of the money market. Why do interest rates rise or fall with a rise or fall in the money supply?)
(e) How would this policy choice(open market purchase of $200 billion) affect the US economy over all?