Answer
Please refer to graph C for these questions.
Work Step by Step
a) With an increased money demand, the demand curve shifts up, and assuming the money supply doesn't change, the interest rate will increase to $r_{2}$.
b) If the Fed were to stabilize aggregate demand, the money supply would have to increase from $S_{M_{1}}$ to $S_{M_{2}}$. This would keep the interest rate at $r_{1}$.
c) The Fed would need to increase the money supply. To do this, the Fed would need to buy bonds on the market (to increase the money supply).
