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Save Score: 0.33 of 1 pt 1 of 2 (2 complete) HW Score: 50%, 1 of 2 pt Text Problem E-2 Question Help induces a $3 billion decrease in real planned investment spending by Suppose that each 0.1-percentage-point increase in the equilibrium interest rate businesses, in addition, the investment multiplier is equal to 5, and the money multiplier is equal money supply brings about the assumption that all other things are equal. to 3 Furthermore, every $8 bilion decrease in the a 0.1-percentage-point increase in the equilibrium interest rate. Use this information to answer the following questions under much the real planned investment must decrease if the Federal Reserve desires to bring about an $80 billion decrease in equilibrium Calculate by how real GDP. $ 16 billion. (Enter your response rounded to one decimal place.) Calculate by how much must the money supply decrease for the Fed to induce the change in real planned investment to bring about an $80 billion decrease in equilibrium real GDP. $ 42.7 billion (Enter your response rounded to one decimal place) Calculate the dollar amount of open market operations that the Fed must undertake to bring about the money supply decrease required for an s80 billion decrease in equilibrium real GDP $ billion (Enter your response rounded to one decimal place.) Enter your answer in the answer box and then click Check Answer All parts showing 010 e

Explanation / Answer

(1)

Required decrease in investment ($ Billion) = Decrease in real GDP/ Investment multiplier = 80/5 = 16.0

(2)

When investment falls by $3 billion, interest rate rises by 0.1%.

When investment falls by $16 billion, interest rate rises by [(16 / 3) x 0.1%] = 0.53%.

Again, 0.1% rise in interest rate decreases money supply by $8 billion.

So, 0.53% rise in interest rate decreases money supply by ($8 billion x 5.3) = $42.7 billion.

(3)

Required open market operations ($ Billion) = Decrease in money supply / Money multiplier = 42.7 / 3 = 14.2

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