Problem:

Assume there is the increase in risk aversion by wealth holders in sense that, other things equal, they want to hold more of their wealth in the money (bank deposits) and less in the securities.

Required:

1. With the aid of a graph of the money market, illustrate out the effect on the interest rate and quantity of money.

2. Assume the policy of Fed is to employ open market operations to return the quantity of money to its original equilibrium level. Describe what the Fed would do and demonstrate your answer graphically.

3. Assess this policy of Fed:  Is it desirable or undesirable?