Are my answers correct? 8. Suppose the Fed decided to purchase $30 billion worth
ID: 1248509 • Letter: A
Question
Are my answers correct?8. Suppose the Fed decided to purchase $30 billion worth of government securities in the
open market. What impact would this action have on the economy?
(a) How would M1 be affected initally?
Answer: The fed is using open market operations and increaseing the supply of money.
(b) By how much will the banking system lending capacity increase if the reserve requirement
is 25%?
Answer: $22,500,000,000
(c ) Must the interest rate rise or fall to induce investors to utilize this expanded lending
capacity?
Answer? Fall
(d) By how much will aggregate demand increase if investors borrow and spend all the newly
Available credit?
Answer: $22,500,000,000
(e) Under the circumstances("recession' or "inflation") would the Fed be pursuing such an open
market policy?
Answer: Recession
(f) To attain those same objectives, What should the Fed do ("increase" or "decrease") with the
(i) Discount Rate?
Answer: increase
(ii) Reserve Requirement?
Answer: decrease
Explanation / Answer
for 8 a) we know that M1 consists of travelers checks and checking deposits owned by individuals so M1 will increase by $30 billion, assuming that the sellers of the securities hold the proceeds as cash or deposit them in a transactions account, e.g., checking account b) Lending capacity will increase by $90 billion. (A money multiplier of 4 x excess reserves of $22.5 billion.) c) is correct lower interest rate will bring about more loans from investors. d)not to sure. e)is correct;in a recession feds are most likely to buy securities to put the economy back on track. f)(i)discount rate is The interest rate at which the Fed will lend reserves to depository institutions so if the want backs to borrow money then it would be wise to decrease the interest rate so the answer is decrease. (ii)correct!
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