After the increase in the price level, the quantity of money demanded at the initial interest rate of 6% will be than the quantity of money supplied by the Fed at this interest rate. People will try to their money holdings. In order to do so, people will bonds and other interest-bearing assets, and bond issuers will find that they interest rates until the money market reaches its new equilibrium at an interest rate of

The following graph shows the money market in a hypothetical economy. The central bank in this economy is called the Fed. Assume that the Fed fixes the quantity of money supplied.

Suppose the price level increases from 150 to 175.

Shift the appropriate curve on the graph to show the impact of an increase in the overall price level on the market for money.

After the increase in the price level, the quantity of money demanded at the initial interest rate of 6% will begreater than the quantity of money supplied by the Fed at this interest rate. People will try toincrease their money holdings. In order to do so, people willsell bonds and other interest-bearing assets, and bond issuers will find that theyhave to offer higher interest rates until the money market reaches its new equilibrium at an interest rate of8%.