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Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985

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BuyFindarrow_forward

Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985
Textbook Problem

Assume that the reserve requirement is 20 percent. Also assume that banks do not hold excess reserves and there is no cash held by the public. The Fed decides that it wants to expand the money supply by $40 million.

a. If the Fed is using open-market operations, will it buy or sell bonds?

b. What quantity of bonds does the Fed need to buy or sell to accomplish the goal? Explain your reasoning.

Subpart (a):

To determine

The action by the Fed to increase the money supply in the economy.

Explanation

The Federal Reserve is the central bank of the US economy and it is usually known as the Fed. The Fed has the responsibility of keeping the economy controlled from fluctuations and it has to control the money supply of the economy through its monetary policies. When the purchase of the government bonds from the public takes place, it will provide the money to the public, which will increase the consumption of the economy. As a result of the multiplier effect, the money supply in the economy will increase by the multiplier times...

Subpart (b):

To determine

The action by the Fed to increase the money supply in the economy.

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