Suppose the Federal Reserve decided to sell $25 billion worth of government securities in the open market. Instructions: Enter your responses as a whole number. a. By how much will M1 change initially if the entire $25 billion is withdrawn from transactions accounts? M1 will initially decrease by $ 25 billion. b. How will the lending capacity of the banking system be affected if the reserve requirement is 10 percent? Total lending capacity will decrease ☑ by $ billion. c. How will banks induce investors to respond to this change in lending capacity? If the money supply increases, interest rates will decrease If the money supply decreases, interest rates will increase and investors will want to borrow more and investors will want to borrow fewer funds. ✓ funds.

Macroeconomics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN:9781305506756
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Chapter13: Money And The Banking System
Section: Chapter Questions
Problem 17CQ
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Suppose the Federal Reserve decided to sell $25 billion worth of government securities in the open market.
Instructions: Enter your responses as a whole number.
a. By how much will M1 change initially if the entire $25 billion is withdrawn from transactions accounts?
M1 will initially decrease
by $
25 billion.
b. How will the lending capacity of the banking system be affected if the reserve requirement is 10 percent?
Total lending capacity will decrease
☑ by $
billion.
c. How will banks induce investors to respond to this change in lending capacity?
If the money supply increases, interest rates will decrease
If the money supply decreases, interest rates will increase
and investors will want to borrow more
and investors will want to borrow fewer
funds.
✓ funds.
Transcribed Image Text:Suppose the Federal Reserve decided to sell $25 billion worth of government securities in the open market. Instructions: Enter your responses as a whole number. a. By how much will M1 change initially if the entire $25 billion is withdrawn from transactions accounts? M1 will initially decrease by $ 25 billion. b. How will the lending capacity of the banking system be affected if the reserve requirement is 10 percent? Total lending capacity will decrease ☑ by $ billion. c. How will banks induce investors to respond to this change in lending capacity? If the money supply increases, interest rates will decrease If the money supply decreases, interest rates will increase and investors will want to borrow more and investors will want to borrow fewer funds. ✓ funds.
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