Question

In: Economics

Suppose the Fed decided to purchase $100 billion worth of government securities in the open market...

Suppose the Fed decided to purchase $100 billion worth of government securities in the open market which are directly deposited into the banking system. What impact would this action have on the economy? Specifically, answer the following questions:

(a) How will M1 be affected initially?

No initial change to M1
Increase by $100 billion
Decrease by $100 billion
Not enough information to answer


(b) By how much will the banking system’s lending capacity increase if the reserve requirement is 20 percent?

Instructions: Enter your response as a whole number.

$ billion

(c) Must interest rates rise or fall to induce investors to utilize this expanded lending capacity?

Fall
Rise

(d) By how much will aggregate demand initially increase if investors borrow and spend all the newly available credit?

Instructions: Enter your response as a whole number.

$ billion

(e) Under what circumstances would the Fed be pursuing such an open market policy?

Recession
Inflation

(f) To attain those same objectives, what should the Fed do with the

(i) Discount rate?

Decrease
Increase

(ii) Reserve requirement?

Increase
Decreas

Solutions

Expert Solution

Rahul Sunny answered 1 year ago
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