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Say that investment increases by $20 for each interest rate drop of 1 percent. Say also that the expenditures multiplier is 4. If the money multiplier is 5, and each 10-unit change in the money supply changes the interest rate by 1 percent, what open market policy would you recommend to increase income by $240?

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Related questions

The Fed wants to increase the money supply (which is currently 4,000) by 200. The money multiplier is 3. For each 1 percentage point the discount rate falls, banks borrow an additional 20. Explain how the Fed can achieve its goals using the following tools: (LO30-3)

a. Change the reserve requirement.

b. Change the discount rate.

c. Use open market operations.

Assume that the banking system has total reserves of $100 million. Assume also that the reserve requirement for checking deposits is 10 percent and that banks do not hold any excess reserves. There is also no currency held by households.

a) What is the money multiplier? What is the money supply?

b) If the FED raises required reserves to 20 percent of deposits, what are the change in reserves and the change in money supply?

c) Now suppose the FED lowers the requirement from 10 percent to 5 percent, but banks choose to hold another 5 percent of deposits as excess reserves. Why might banks do so? What is the overall change in the money multiplier and the money supply as a result of these actions?

d) If the FED sells $1 million of government bonds, what is the effect on the economy's reserves and money supply? Use 10 percent required reserve ratio.

e) If the FED buys $5 million of government bonds, what is the effect on the economy's reserves and money supply? Use 10 percent required reserve ratio.

The Fed wants to increase the money supply (which is currently 6,000) by 300. The money multiplier is 4, and people hold no cash. For each 1 percentage point the discount rate falls, banks borrow an additional 30. Explain how the Fed can achieve its goals using the following tools:

a. Change the reserve requirement. 

b. Change the discount rate. 

c. Use open market operations. 

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