1- suppose the money supply is $14 trillion, and the fed sells bonds on the open...

1- suppose the money supply is $14 trillion, and the fed sells bonds on the open market in sufficient quantities to decrease the money supply by $500 billion. what impact will this have on the interest rate, investment spending, real GDP, and the price level? draw graphs to illustrate your points, and describe them and the points thereon thoroughly.

2- the federal reserve system, also known simply as the fed, is the central bank of the united states. the fed has several important functions such as supplying the economy with currency, holding deposits of banks, lending money to banks, regulating the money supply, and supervising the banking system. explain how the federal reserve and the banking system creates money (i.e., increases the supply of money). is this an inherently inflationary practice? explain the factors that affect the demand for money.

3- suppose the fed decreases the discount rate and buys bonds sufficient to increase the money supply by $200 billion. what impact will this have on the interest rate, investment spending, real GDP, and the price level? would that be a good idea in today's economic environment? why or why not? draw graphs to illustrate your points, and describe them and the points thereon thoroughly.

Solutions

Expert Solution

(1)

When Fed sells bonds, money supply decreases, which increases interest rate. At higher interest rate, investment spending falls, decreasing aggregate demand. The AD curve shifts leftward, decreasing both price level and real GDP in short run.

In following graph, MD0 and MS0 are initial demand and supply curves of money, intersecting at point A with initial interest rate r0 and quantity of money M0. When money supply falls, MS0 shifts left to MS1, intersecting MD0 at point B with higher interest rate r1 and lower quantity of money M1.

In following graph, AD0 and SRAS0 are initial aggregate demand and short-run aggregate supply curves intersecting at point A with initial price level P0 and initial real GDP Y0. When aggregate demand falls, AD0 shifts left to AD1, intersecting SRAS0 at point B with lower price level P1 and lower real GDP Y1.

NOTE: As per Answering Policy, 1st question is answered.

Rahul Sunny answered 1 year ago

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