The interest rate decreases

The quantity of money demanded increases.

As the Federal Reserve buys Treasury securities from the public, demand deposits
in financial institutions increase. Thus financial institutions have more money to
make loans. To encourage people to take out the loans, the financial institutions
lower the interest rate.

The interest rate increases.

The quantity of money supplied remains the same, as shown by the vertical
money supply curve.

y. It must increase the money supply to meet the increase in the demand for
money.

To stabilize the amount of investment in the economy

The interest rate declines further with the more inelastic money demand curve (MD1) than
with the more elastic money demand curve (MD)

With either demand curve, the increase in supply will cause interest rates to decline and
investment and consumption — and thus real output — to increase. AD increases, so prices
are likely to increase. For the interest-sensitive component of consumption and investment,
there will be a greater increase (or decrease) with a greater decrease (or increase) in the
interest rate. For example, a larger decrease in interest rates will usually lead to a greater
increase in investment. The increase in investment will increase aggregate demand. Thus,
the increase in the money supply will lead to an increase in AD, which will lead to an
increase in real output and in the price level.
MD1 is more interest inelastic than MD.

The Fed would prefer the moreinelastic money demand curve because a given
increase in the money supply will lead to a greater decrease in interest rates, which
should stimulate the economy.