Question

The Fed sells $30,000,000 in bonds to Jim, a bond dealer who pays for the bonds with a check drawn on his bank. Assume a 10% required reserve atio. Which of the following statements correctly records this transaction at Jim's bank with respect to the bank's reserves? O A. The bank's reserves will go down by $30,000,000. O B. The bank's reserves wil go up by S30,000,000. OC. The bank's reserves will go up by $1,000,000. 0 D. The bank's reserves will go down by $100,000,000.

Answer 1

Fed sells bonds worth 30,000,000 to a bond dealer. He pays for the bonds with a check drawn on his bank. This is similar to withdrawal of that amount from his bank account. Therefore, bank's reserves will go down by $30,000,000 In the given graph, short run equilibrium (determined by the intersection of AD and SRAS) occurs left to the LRAS. This indicates that actual output is less than potential output and this situation is called a recessionary gap Fiscal policy correction Fiscal policy to correct recessionary gap is expansionary fiscal policy. This includes tax reductions, increased government spending and increased transfer payment etc. it leads to an increase in aggregate demand. This change in aggregate demand can be graphically represented as follows. \r\n As expansionary monetary policy shifts the Aggregate demand curve to right. In figure it is represented by AD_1. Now the intersection of SRAS and AD occurs on the LRAS. Here, actual output is equal

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