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Monetary Policy

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Below are events that might affect the supply of money, the demand for money, and/or the interest rate. Explain how each event may affect these three economic variables. Use graphs if appropriate.

1.The Fed buys securities in the open market.
2.The reserve requirement is increased.
3.Consumers decide to save and reduce their spending on consumer goods.

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Monetary Policy

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1.

Fed buys securities in open market
=> demand for bonds go up
=> price of bond increase
=> interest rate falls (to see why bond price goes up implies interest rate goes down, consider a bond that sells for 100 and pays 5 every year, interest rate is 5%. If bond price goes up to 200, interest ...

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