5. Quantity of Federal Funds Borrowed and Lent Federal Funds Rate 6 % Supply of Federal Funds Demand for Federal Funds E

6. Federal Funds Rate 6 % New Supply of Federal Funds Demand for Federal Funds E1E1 E0E0 5 % Original Supply of Federal Funds Quantity of Federal Funds Borrowed and Lent

7. Quantity of federal funds borrowed and lent Federal Funds Rate Demand for Federal Funds E1E1 E0E0 5 % Supply of Federal Funds Target Rate A B

8. Prime Rate Federal Funds Rate Interest Rate (%) 2000 200520042003 2002 2001 2007 2006

9. Intended Investment (II ) Interest rate (r ) II r0r0 II 0 II 1 r1r1

10. Intended Investment (II ) Interest rate (r ) II 0 II 1 r

11. 45 Income Aggregate Demand and Output AD 1 (with new, lower interest rate, r 1 ) E1E1 E0E0 AD 0 (with old interest rate, r 0 ) Y1Y1 Y0Y0

12. Expansionary monetary policy Lowers interest rates Investment is encouraged Aggregate demand rises Equilibrium GDP rises

13. Federal Funds Rate (%) 2000 200520042003 2002 2001 2007 2006

14. Nonresidential Investment Residential Investment Private Fixed Investment (billions of 2000 dollars) 2000 2005 2004 2003 2002 2001 2007 2006

15. Intended Investment (II) Interest rate (r ) II 0 II 1 5% II 1 8% A B Original Target Rate New Target Rate II 0

16. Quantity of Bonds Price of Bonds (and interest rate) $ 100 (i = 5%) Supply of Bonds Demand for Bonds E

17. Quantity of Bonds Price of Bonds (and interest rate) $ 100 (i = 5%) Supply of Bonds Original Demand for Bonds E0E0 E1E1 $103 (i = 2%) New Demand for Bonds

18. 3 month T-bill Federal Funds Rate Interest Rate (%) 2000 200520042003 20022001 2007 2006

19. Quantity of Money Interest Rate (i ) i0i0 Money Supply Money Demand E0E0 E1E1 i1i1

20. Interest Rate (%) 2000 2005 1995 Federal Funds Rate Nominal 30-Year Mortgage Rate Real 30-Year Mortgage Rate