home / study / business / economics / economics questions and answers / for ques

Question

home / study / business / economics / economics questions and answers / for questions 7 – 11, assume that no banks wish to hold excess reserves and that people prefer ... Question: For Questions 7 – 11, assume that no banks wish to hold excess reserves and that people prefer ... For Questions 7 – 11, assume that no banks wish to hold excess reserves and that people prefer to hold all of their money in checkable deposits. Additionally, assume that banks are holding zero excess reserves when the Fed first undertakes any of the described actions. For ease in submitting answers you may use "+" in place of "increase," "-" in place of "decrease," and "0" in place of "stays the same." (Don't use the quotation marks.) For Questions 7 – 11, assume that no banks wish to 7. If the Fed is currently holding the money supply at $200, the equilibrium interest rate will be ________%, and firms will want to undertake $ ________ of investment spending. 8. The money supply is $200. With a reserve ratio of 0.20, the Fed buys $20 worth of Treasury bills from commercial banks. The resulting equilibrium money supply will be $ ______, at an interest rate of ______%, and firms will want to undertake $ ________ of investment spending 9. Suppose the current equilibrium interest rate is 6% while the reserve ratio is 10%. If the Fed sells $10 worth of Treasury bills to commercial banks, the money supply will (increase, decrease) ________ to $ ________, and the interest rate will (increase, decrease) ________ to ________ %. Investment spending will (increase, decrease) ________ to $ ________. 10. Now suppose the interest rate is currently 9%, the reserve ratio is 25%, and the Fed would like to adjust interest rates enough to increase Investment spending (I) by $40. The Fed would need to (buy, sell) ________ T bills in the amount of $ ________ which would (increase, decrease) the money supply by ________ and (increase, decrease) interest rates by ________%. 11. The equilibrium interest rate is currently 6%, while the reserve ratio is 10%. The banking system currently has required reserves of $20 and zero excess reserves. The Fed decides to increase the reserve ratio to 20%. The money supply will (increase, decrease) ________ by $ ________ as a result of this change, causing the interest rate to (increase, decrease) to ________% and investment spending to (increase, decrease) ________ to $ ________.

Explanation / Answer

Question 7

When Fed is holding money supply at 200 then money supply curve is intersecting the money demand curve corrresponding to interest rate of 6%.

The interest rate corresponding to intersection of money supply curve and money demand curve is the equilibrium interest rate.

At Interest rate of 6%, investment demand or investment spending is 60.

So,

If the Fed is currently holding the money supply at $200, the equilibrium interest rate will be 6%, and firms will want to undertake $ 60 of investment spending.

Related Questions

Navigate

• Browse (All)
• Browse H
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.