a) If the reserve ratio is 20 percent, what is the maximum potential change in the money supply? b) Why might the mond supply not grow by this much? c) What will this purchase by the Fed do to interest rates? Why?

a) If the reserve ratio is 20 percent, what is the maximum potential change in the money supply? b) Why might the mond supply not grow by this much? c) What will this purchase by the Fed do to interest rates? Why?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Suppose the Fed decided to purchase $60 billion worth of government securities on the open
market.
a) If the reserve ratio is 20 percent, what is the maximum potential change in the money
supply?
b) Why might the mond supply not grow by this much?
c) What will this purchase by the Fed do to interest rates? Why?
d) Under what circumstances (recession or inflation) would the Fed be pursuing such an
open market policy?
e) To attain those same objectives, what should the Fed do (increase or decrease) with the
a.
discount rate?
b. reserve requirement?
hp

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