Assume that the following conditions exist: a. All banks are fully loaned up- th

Question

Assume that the following conditions exist:

a. All banks are fully loaned up- there are no excess reserves, and desired excess reserves are always zero.

b. The money multiplier is 7.

c. The planned investment schedule is such that at a 4 percent rate of interest, Investment =$1450 billion. At 5 percent, investment is $1430 billion.

d. The investment multiplier is 3.

e.. The initial equilibrium level of real GDP is $13 trillion.

f. The equilibrium rate of interest is 4 percent

Now the Fed engages in contractionary monetary policy. It sells $1 billion worth of bonds, which reduces the money supply, which in turn raises the market rate of interest by 1 percentage point. Calculate the decrease in money supply after FED's sale of bonds: _____ billion.

Explanation / Answer

decrease in money supply after FED's sale of bonds: __7___ billion.

change= change in money supply *money multiplier

= 1*7

=7

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