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Assume the reserve requirement is 20% and the MPC = 0.5 for the economy when a stock market downturn reduces aggregate demand by $120 billion.

a. Suppose the Federal Reserve wants to increase investment demand to offset the reduction in aggregate demand. To accomplish this goal, how much does investment demand need to increase? how many $ billion?

b. To increase investment demand by the desired amount, the Fed estimates that interest rates will need to decrease/increase by 2% and the money supply will need to decrease/increase by $260 billion.

c. In order to achieve the $260 billion change in the money supply, the Fed will make an open market sale or open market purchase of $ billion

 

 

 

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Kritika Krishnakumar
Kritika KrishnakumarLv10
28 Sep 2019

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1. Which of the following will cause the aggregate demand curve to shift to the left?

A. a reduction in interest rates

B. An expansionary monetary policy

C. A reduction in the reserve requirement

D. Fed sales of bonds to the public

E. None of the above

 

2. Suppose the demand for money falls. In order to maintain interest rates at their previous level, the Fed might:

A. Sell government securities

B. Lower the reserve requirement

C. Lower the discount rate

D. Sell additional reserves through the Term Auction Facility

E. None of the above

 

3. Suppose banks are just meeting their reserve requirement of 25% and the Fed sells $30 billion in government securities to commercial banks. The effect of this sale is to:

A. Increase excess reserves by $30 billion

B. Reduce excess reserves by $7.5 billion

C. Reduce the potential money supply by $90 billion

D. Reduce the potential money supply by $120 billion

E. None of the above

 

4. If the intent of the Fed is to increase GDP, it should:

A. Raise the reserve requirement

B. Raise the discount rate

C. Purchase government securities in the open market

D. Ask banks to reduce their amount of loans outstanding

E. None of the above

5. For some time now, the U.S. has been pressuring Japan to institute policies to improve its weak economy. What effect would these policies have on the U.S.?

A) They would cause the U.S. to move up its aggregate demand curve.

B) They would cause the U.S. to move down the aggregate demand curve.

C) They would shift the U.S. aggregate demand curve left.

D) They would shift the U.S. aggregate demand curve right.

1) Which of the following actions on the part of the Fed will result in a decrease in the money supply?

  A. Decreasing the reserve requirement.
  B. Buying government securities in the open market.
  C. Increasing the Discount Rate.
  D. Decreasing the Fed Funds Rate.

2) Suppose the reserve requirement is 25% and there are no cash holdings by the public. A $1 billion purchase of government securities by the Federal Reserve will:

  A. increase the potential amount of checkable deposits in the banking system by $4 billion.
  B. increase the potential amount of checkable deposits in the banking system by $1 billion.
  C. reduce the potential amount of checkable deposits in the banking system by $1 billion.
  D. reduce the potential amount of checkable deposits in the banking system by $4 billion.

3) If the Fed decreases the reserve requirement, financial institutions will likely lend out ______________ than before, __________________ the money supply.

  A. more; increasing
  B. less; decreasing
  C. more; decreasing
  D. less; increasing

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