Question

26. Suppose that the money multiplier is 4.3 and that for every $53 billion change in the money supply, interest rates will change by 1.2%. Also, for every 1% change in interest rates, investment will change by $33 billion. And, for every $2.5 billion change in investment, income will change by $7. If the Fed buys $35 billion of bonds, what will be the expected change in the level of investment (rounded off to billions of dollars)?

a. $552 billion. b. $315 billion. c. $112 billion. d. -$150 billion. e. -$228 billion.

27. Suppose that the money multiplier is 4.3 and that for every $53 billion change in the money supply, interest rates will change by 1.2%. Also, for every 1% change in interest rates, investment will change by $33 billion. And, for every $2.5 billion change in investment, income will change by $7. If the Fed sells $35 billion of bonds, what will be the expected change in level of the money supply (rounded off to billions of dollars)?

a. $552 billion. b. $315 billion. c. $112 billion. d. -$150 billion. e. -$228 billion.

28. Suppose that the money multiplier is 4.3 and that for every $53 billion change in the money supply, interest rates will change by 1.2%. Also, for every 1% change in interest rates, investment will change by $33 billion. And, for every $2.5 billion change in investment, income will change by $7. If the Fed sells $35 billion of bonds, what will be the expected change in interest rates (rounded off to one decimal place)?

a. +4.3% b. +2.7% c. +0.3% d. -3.4% e. -6.6%

29. Suppose that the money multiplier is 4.3 and that for every $53 billion change in the money supply, interest rates will change by 1.2%. Also, for every 1% change in interest rates, investment will change by $33 billion. And, for every $2.5 billion change in investment, income will change by $7. If the Fed buys $35 billion of bonds, what will be the expected change in income (rounded off to billions of dollars)?

a. $552 billion. b. $315 billion. c. $112 billion. d. -$150 billion. e. -$228 billion.

Answer 1

Ans 26. If Fed buys $35 billion of bonds, this will increase monetary base, H by $35 billion

As money multiplier, m, is 4.3, then the increase in money supply, M, is equal to $150.5 billion (m*H).

As every $53 billion change in money supply interest rate will change by 1.2%, so, an increase in money supply by $150.5 billion will decrease the interest rate by 3.41%(1.2*150.5/53)

As every 1% change in interest rate causes a change of $33 billion change in investment, the 3.41% decrease in investment will increase the investment by $112.53 billion (3.41*33 billion)

As a $2.5 billion change in investment will change the income by $7 billion. This means an increase of $122.53 billions in investment will increase income by $315.08 billion (7*112.53/2.5)

Ans 1. Option c

Ans 2. Option d

Ans 3. Option d

Ans 4. Option b

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