Employing Figure 4-2 above, the money market is initially in equilibrium at point G and after the economy moves to equilibrium, the Federal Reserve increases the money supply by 500. We would observe:
1) Y rises to 4000 as interest rates remain stable.
2) The interest rate first rises to 7.5% and Y to 3500.
3) The interest rate first rises to 7.5% then falls to 5%.
4) The economy moves from point G to C, to F then D.