1. Fed raising the interest rate to fight inflation
“Change in Money Supplied”
Chapter 12
Student name

3. Money Supply and Interest rate before
Fed works to increase Interest rate
Nominal Interest Rate
(percent per year) MS MD
Quantity of money
- Equilibrium point
- Demand for Money MD
- Supply of Money MS

4. Money Supply and Interest rate after
Fed worked to increase Interest rate
To fight inflation rates, the
Fed proposes that
the interest rate be raised.
Nominal Interest Rate
(percent per year) MS MS 2 1
To do this the Fed
sells bonds that decreases
the Quantity of Money
Supplied.
(MS1 to MS2) MD
By decreasing
the money supplied,
the Fed is able to move
the equilibrium
interest rate along the
MD curve, thus increasing
the interest rate.
Quantity of money
- Equilibrium point
- Demand for Money MD
- Supply of Money MS 1
- New Equilibrium point
- Supply of Money after Fed prints new money MS 2