Use a money market graph to show the effect of an open market purchase of U.S. Treasury securities by the Federal Reserve. Use the results from your graph to explain why the aggregate demand curve shifts when the Fed purchases Treasury securities.

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Interest rate, i MD Real money balances, M i Interest rate, i 2.... raising the equilibrium interest rate. MY 1. An increase in the price level causes the supply of real balances to shift to the left... MD Real money balances, P M (a) The market for money Figure 17.2 The Money Market In panel (a), the demand for real balances is downward sloping because higher short-term interest rates increase the opportunity cost of holding money. The supply of real balances is a vertical line because we assume for simplicity that the Fed can control perfectly the level of M1. (b) The effect of an increase in the price level In panel (b), we show that an increase in the price level causes the supply curve for real balances to shift from (M/P) to (M/P), thereby increas- ing the equilibrium interest rate from i to i.