Question 34 12 points Saved If the required reserve ratio is 0.8 and the Fed buy

Question

Question 34 12 points Saved If the required reserve ratio is 0.8 and the Fed buys $1000 million worth of securities, the effect on the money supply is a million increase (enter increase or decrease). This increase in the money supply in turn 200 decreases or decreases) Investment, which shifts the aggregate demand curve ultimately increases (enter increases or decreases) the interest rate which in turn increases (enter increases right (enter left or right) which (enter increases or decreases) RGDP

Explanation / Answer

It is provided that the reserve ratio is 0.8 and the Fed buys $1000 million worth of securities. This means that it is mandatory for the bank to keep 80% of its deposits or $800 million in the form of cash in the bank. If the reserve ratio is 80%, this means that the bank has the remaining 20% (that is, 100-80)% or $200 million available for lending to the borrowers. The money supply increases by the same amount, that is, $200 million.

Now, since, there is an inverse relationship between the money supply and the interest rate, an increase in the money supply will decrease the interest rate. Also, since there is an inverse relationship between the interest rate and the investment, hence, a decrease in the interest rate will increase the amount of investment.

An increase in the investment has a positive impact on the aggregate demand curve. Therefore, the aggregate demand increases with an increase in investment and as a result, the demand curve will shift rightwards with an amount equivalent to the increase in the investment.

As, the aggregate demand is a measure for calculating the Gross Domestic Product of an economy, an increase in the aggregate demand will increase the RGDP (Real Gross Domestic Product). An increase in demand results in an increase in the RGDP.

Thus, combining all the explanations of the answers, the blanks will be filled with the following answers:

If the required reserve ratio is 0.8 and the Fed buys $1000 million worth of securities, the effect on the money supply is a $200 million increase (enter increase or decrease). This increase in the money supply in turn decreases (enter increases or decreases) the interest rate, which in turn increases (enter increases or decreases) Investment, which shifts the aggregate demand curve right (enter left or right) which ultimately increases (enter increases or decreases) RGDP.

Related Questions

Navigate

• Browse (All)
• Browse Q
• Subjects

---

---

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