Suppose the Fed decided to purchase $100 billion worth of government securities in the open market. Assume all payments are directly deposited into or withdrawn from the banking system. What impact would this action have on the economy? Specifically, answer the following questions. Instructions: Enter your responses as a whole number. a. How will M1 be affected initially? O Decrease by $100 billion O Increase by $100 billion O Not enough information to answer O No initial change to M1 b. By how much will the banking system's lending capacity increase if the reserve requirement is 20 percent? $ billion c. Must interest rates rise or fall to induce investors to utilize this expanded lending capacity? O Rise O Fall d. By how much will aggregate demand initially increase if investors borrow and spend all the newly available credit? $ billion e. Under what circumstances would the Fed be pursuing such an open market policy? O Inflation O Recession f. To attain those same objectives, what should the Fed do with the (i) Discount rate? O Decrease O Increase (ii) Reserve requirement? O Decrease O Increase
Suppose the Fed decided to purchase $100 billion worth of government securities in the open market. Assume all payments are directly deposited into or withdrawn from the banking system. What impact would this action have on the economy? Specifically, answer the following questions. Instructions: Enter your responses as a whole number. a. How will M1 be affected initially? O Decrease by $100 billion O Increase by $100 billion O Not enough information to answer O No initial change to M1 b. By how much will the banking system's lending capacity increase if the reserve requirement is 20 percent? $ billion c. Must interest rates rise or fall to induce investors to utilize this expanded lending capacity? O Rise O Fall d. By how much will aggregate demand initially increase if investors borrow and spend all the newly available credit? $ billion e. Under what circumstances would the Fed be pursuing such an open market policy? O Inflation O Recession f. To attain those same objectives, what should the Fed do with the (i) Discount rate? O Decrease O Increase (ii) Reserve requirement? O Decrease O Increase
Economics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN:9781305506725
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Chapter13: Money And The Banking System
Section: Chapter Questions
Problem 18CQ
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