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Suppose the Fed decided to purchase $100 billion worth of government securities in the open market. Assume all payments are directly deposited into or withdrawn from the banking system. What impact would this action have on the economy? Specifically, answer the following questions. Instructions: Enter your responses as a whole number. a. How will M1 be affected initially? No initial change to M1 Increase by $100 billion Decrease by $100 billion Not enough information to answer b. By how much will the banking system's lending capacity increase if the reserve requirement is 20 percent? $ 500 billion c. Must interest rates rise or fall to induce investors to utilize this expanded lending capacity? Fall Rise d. By how much will aggregate demand initially increase if investors borrow and spend all the newly available credit? $ 80 billion

Suppose the Fed decided to purchase $100 billion worth of government securities in the open market. Assume all payments are directly deposited into or withdrawn from the banking system. What impact would this action have on the economy? Specifically, answer the following questions. Instructions: Enter your responses as a whole number. a. How will M1 be affected initially? No initial change to M1 Increase by $100 billion Decrease by $100 billion Not enough information to answer b. By how much will the banking system's lending capacity increase if the reserve requirement is 20 percent? $ 500 billion c. Must interest rates rise or fall to induce investors to utilize this expanded lending capacity? Fall Rise d. By how much will aggregate demand initially increase if investors borrow and spend all the newly available credit? $ 80 billion

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Suppose the Fed decided to purchase $100 billion worth of government securities in the open market. Assume all payments are directly deposited into or withdrawn from the banking system. What impact would this action have on the economy? Specifically, answer the following questions. Instructions: Enter your responses as a whole number. a. How will M1 be affected initially? No initial change to M1 Increase by $100 billion Decrease by $100 billion Not enough information to answer > b. By how much will the banking system's lending capacity increase if the reserve requirement is 20 percent? $ 500 billion c. Must interest rates rise or fall to induce investors to utilize this expanded lending capacity? Fall Rise d. By how much will aggregate demand initially increase if investors borrow and spend all the newly available credit? 80 ✰ billion
Transcribed Image Text:Suppose the Fed decided to purchase $100 billion worth of government securities in the open market. Assume all payments are directly deposited into or withdrawn from the banking system. What impact would this action have on the economy? Specifically, answer the following questions. Instructions: Enter your responses as a whole number. a. How will M1 be affected initially? No initial change to M1 Increase by $100 billion Decrease by $100 billion Not enough information to answer > b. By how much will the banking system's lending capacity increase if the reserve requirement is 20 percent? $ 500 billion c. Must interest rates rise or fall to induce investors to utilize this expanded lending capacity? Fall Rise d. By how much will aggregate demand initially increase if investors borrow and spend all the newly available credit? 80 ✰ billion
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