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Graphically illustrate the impact of an open-market purchase by the Federal Reserve on the equilibrium interest rate using the theory of liquidity preference and the market for real money balances. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curve shifts; and v. the terminal equilibrium values.
b. Explain in words what happens to the equilibrium interest rate as a result of the open-market purchase.
c.
Sole Proprietorship
A company that is owned and run by just one person, with no legal separation between the owner and the business itself.
Limited Liability Company
A business structure that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation.
Discretionary Income
The amount of an individual's income left for spending, investing, or saving after taxes and basic necessities have been paid.
Free Market
An economic system in which prices are determined by unrestricted competition between privately owned businesses.
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