Suppose the Fed announces that it is lowering its target interest rate by 75 basis points, or 0.75 percentage point. To do this, the Fed will use open-market operations to (increase) or (decrease) the (supply of) or (demand of) money by (Buying bonds from) or (Selling bonds to) the public.
Use the green line (triangle symbol) on the previous graph to illustrate the effects of this policy by placing the new money supply curve (MS) in the correct location. Place the black point (plus symbol) at the new equilibrium interest rate and quantity of money.
Suppose the following graph ( the first graph) shows the aggregate demand curve for this economy. The Fed's policy of targeting a lower interest rate will (Increase) or (reduce) the cost of borrowing, causing residential and business investment spending to ( Decrease) or (increase) and the quantity of output demanded to ( Decrease) or (increase) at each price level.