This Question: 1 pt 1 of 4 (3 complete) | This Quiz: 4 pts possil Suppose that e

Question

This Question: 1 pt 1 of 4 (3 complete) | This Quiz: 4 pts possil Suppose that each 0.1 percentage point decrease in the equilibrium interest rate induces a $10 billion increase in real planned investment spending by businesses. In addition, the autonomous spending multiplier is 5 and the money multiplier is equal to 4. Furthermore, every $20 billion increase in the money supply brings about a 0.1 percentage point reduction in the equilibrium interest rate. How much must real planned investment increase if the Fed desires to bring about a $400 billion increase in real GDP? O A. $400 billion. O B. $2,000 billion. O c. $ 100 billion. O D. $ 80 billion. What dollar amount of open market operations must the Fed undertake to bring about the money supply change you calculated in the previous question? O A. $ 40 billion. OB. $ 100 billion. O c. S 160 billion. O D. $400 billion. Click to select your answer Type here to search ° e@

Explanation / Answer

(1) (D)

Required increase in investment ($ Billion) = Increase in real GDP/ Autonomous spending multiplier = 400/5 = 80

(2) (A)

When investment rises by $10 billion, interest rate falls by 0.1%.

When investment rises by $80 billion, interest rate falls by [(80 / 10) x 0.1%] = 0.8%.

Again, 0.1% fall in interest rate increases money supply by $20 billion.

So, 0.8% fall in interest rate increases money supply by ($20 billion x 8) = $160 billion.

Required open market operations ($ Billion) = Increase in money supply / Money multiplier = 160 / 4 = 40

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