Suppose that the federal reserve wishes to keep nominal interest rate at a target level of 5%. Draw a money supply and demand diagram in which the current equilibrium interest rate is 5%. Explain how the federal reserve, using Open Market Operations monetary policy, could keep the interest rate at its target level if the demand for money suddenly declines. How does this affect equilibrium GDP?
When there's a decline in money demand, the Md curve shifts back to the left and put a downward pressure to the interest rate. In order to keep ...
Investigate equilibrium GDP.