Assume that the following conditions exist: a. All banks are fully loaned up- there are no...

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Assume that the following conditions exist: a. All banks are fully loaned up- there are no...

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 4 .

c. The planned investment schedule is such that at a 4 percent rate of interest, Investment =$1520 billion. At 5 percent, investment is $1510 billion.

d. The investment multiplier is 5 .

e. The initial equilibrium level of real GDP is $14 trillion.

f. The equilibrium rate of interest is 4 percent

Now the Fed engages in contractionary monetary policy. It sells $2 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

business economics

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Answer 1

Answer #1

Answer - Money multiplier = 4

Sale of bonds = $ 2 billion

Total decrease in money supply = $ 2 billion * 4

= $ 8 billion

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Answer 2

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