. Suppose that current money supply is $8,000. The required reserve ratio is 0.2
ID: 1203887 • Letter: #
Question
. Suppose that current money supply is $8,000. The required reserve ratio is 0.2 If the Fed wishes to decrease the money supply by $600. Determine the following: (2 points) All underlying work must be shown
a. What open market operations would the Fed have to take to achieve the stated desired change in the money supply?
c. How much should the Fed buy or sell in the government bonds to achieve the stated desired change in the money supply.
d. What would the money supply in the economy as the result of the Fed action be?
Explanation / Answer
answer a) to decrease the money supply by 600$ Fed has to sell securities/bonds in open market as it would reduce the money supply available.
answer b) diagram b illustrates the step taken by Fed,as with selling of bonds its supply will shift towards right i.e.S1 as shown in diagram.
Answer c) new money supply required=8000-600 $
=7400$
thus with reserve rate 0.2,$120 worth securities has to be bought ( 600*0.2= 120)
check
120*0.2=600
d) new money supply will be 7400$
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