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Unformatted text preview: a) When more ATMs are available, so that people's money demand is reduced, the money-demand curve shifts to the left from MD1 to MD2, as shown in Figure. If the Fed does not change the money supply, which is at MS1, the interest rate will decline from r1 to r2. The decline in the interest rate shifts the aggregate demand curve to the right, as consumption and investment increase. b) If the Fed wants to stabilize aggregate demand, it should reduce the money supply to MS2, so the interest rate will remain at r1 and aggregate demand won't change. c) When the Feds bond traders buy bonds in open-market operations, the money-supply curve shifts to the right from MS 1 to MS 2 , as shown in Figure. The result is a decline in the interest rate. Question 3 a) MD increase, interest increase b) AD increase, output increase, price increase c) SR: AS decrease, price increase, AD increase d) Price increase, MD increase, interest increase e) Yes, initial output increase, AD increase...
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- Spring '11