Suppose the Fed decided to purchase $100 billion worth of government securities in the open market which is 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?
Decrease by $100 billion
No initial change to M1
Not enough information to answer
Increase by $100 billion
(b) By how much will the banking system's lending capacity increase if the reserve requirement is 20 per cent?
Instructions: Enter your response as a whole number.
(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 increase initially (before the effects of the multiplier) if investors borrow and spend all the newly available credit?
Instructions: Enter your response as a whole number.
Suppose the Fed decided to purchase $100 billion worth of government securities in the open market which is 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?
| Decrease by $100 billion | |
| No initial change to M1 | |
| Not enough information to answer | |
| Increase by $100 billion |
(b) By how much will the banking system's lending capacity increase if the reserve requirement is 20 per cent?
Instructions: Enter your response as a whole number.
(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 increase initially (before the effects of the multiplier) if investors borrow and spend all the newly available credit?
Instructions: Enter your response as a whole number.
