Suppose that the current money market equilibrium has an interest rate of 5 percent and a quantity of $2 trillion. Suppose that at a 6 percent interest rate, the quantity of money demanded is $1.5 trillion, while at a 4 percent interest rate it is $2.5 trillion. If the Fed makes an open-market purchase of $50 billion, and the money multiplier is 10, what will be the new money market equilibrium?
A) An interest rate of 6 percent and a quantity of $1.5 trillion.
B) An interest rate of 5 percent and a quantity of $2 trillion.
C) An interest rate of 4 percent and a quantity of $2.5 trillion.
D) None of the above.

Question

Quizplus · Accepted Answer

The open-market purchase increases the money supply by $50 billion * 10 = $500 billion. This shifts the money supply curve to the right, leading to a new equilibrium at a lower interest rate of 4 percent and a higher quantity of $2.5 trillion.

Suppose That the Current Money Market Equilibrium Has an Interest