Solve the monetary policy solution for each of the following scenarios. a. Suppo

Question

Solve the monetary policy solution for each of the following scenarios.

a. Suppose there is a surge in consumer confidence that creates an increase in aggregate demand in the economy. The Federal Reserve estimates that a change in the money supply of $120 billion will adjust interest rates enough to offset the change in aggregate demand. If the reserve requirement is 25%, what action should the Fed take to reach the desired change in the money supply?

     The Fed should conduct an (open market purchase / open market sale) of $______ billion.

b. Suppose there is a political crisis in Europe that causes a reduction in investment demand in the United States. To stimulate investment demand, the Federal Reserve decides the money supply needs to change by $150 billion. If the reserve requirement is 10%, what action should the Fed take to reach the desired change in the money supply?

     The Fed should conduct an (open market purchase / open market sale) of $_____ billion.

Explanation / Answer

a.

Money multiplier = 1/rrr = 1/0.25 = 4

Required policy: Contractionary monetary policy

The Fed should conduct an open market sale of $120/4 = $30 billion.

b.

Money multiplier = 1/rrr = 1/0.1 = 10

Required policy: Expansionary monetary policy

The Fed should conduct an open market purchase of $150/10 = $15 billion.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

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