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Conceptual / Calculation Question Suppose the Central Bank decided to purchase $50 billion worth of government securities in the open market. What impact would this action have on the economy? Specifically, you are required to answer the following Questions: a. Explain how will M1 be affected initially? b. By how much will the banking system's lending capacity increase if the reserve requirement is 25 percent? Why? c. Should interest rates rise or fall to induce investors to utilize this expanded lending capacity? Why? d. By how much will aggregate demand increase if investors borrow and spend all the newly available credit? Why? e. Under what circumstances (A = "recession" or B = "inflation") would the Central Bank be pursuing such an open market policy? Why? f. To attain those same objectives, explain what the Central Bank should do (A ="increase" or B = "decrease") with the: i. Discount rate? ii. Reserve requirement?

Conceptual / Calculation Question Suppose the Central Bank decided to purchase $50 billion worth of government securities in the open market. What impact would this action have on the economy? Specifically, you are required to answer the following Questions: a. Explain how will M1 be affected initially? b. By how much will the banking system's lending capacity increase if the reserve requirement is 25 percent? Why? c. Should interest rates rise or fall to induce investors to utilize this expanded lending capacity? Why? d. By how much will aggregate demand increase if investors borrow and spend all the newly available credit? Why? e. Under what circumstances (A = "recession" or B = "inflation") would the Central Bank be pursuing such an open market policy? Why? f. To attain those same objectives, explain what the Central Bank should do (A ="increase" or B = "decrease") with the: i. Discount rate? ii. Reserve requirement?

Macroeconomics: Private and Public Choice (MindTap Course List)
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 18CQ
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Conceptual / Calculation Question Suppose the Central Bank decided to purchase $50 billion worth of government securities in the open market. What impact would this action have on the economy? Specifically, you are required to answer the following Questions: a. Explain how will M1 be affected initially? b. By how much will the banking system's lending capacity increase if the reserve requirement is 25 percent? Why? c. Should interest rates rise or fall to induce investors to utilize this expanded lending capacity? Why? d. By how much will aggregate demand increase if investors borrow and spend all the newly available credit? Why? e. Under what circumstances (A = "recession" or B = "inflation") would the Central Bank be pursuing such an open market policy? Why? f. To attain those same objectives, explain what the Central Bank should do (A = "increase" or B "decrease") with the: i. Discount rate? ii. Reserve requirement?
Transcribed Image Text:Conceptual / Calculation Question Suppose the Central Bank decided to purchase $50 billion worth of government securities in the open market. What impact would this action have on the economy? Specifically, you are required to answer the following Questions: a. Explain how will M1 be affected initially? b. By how much will the banking system's lending capacity increase if the reserve requirement is 25 percent? Why? c. Should interest rates rise or fall to induce investors to utilize this expanded lending capacity? Why? d. By how much will aggregate demand increase if investors borrow and spend all the newly available credit? Why? e. Under what circumstances (A = "recession" or B = "inflation") would the Central Bank be pursuing such an open market policy? Why? f. To attain those same objectives, explain what the Central Bank should do (A = "increase" or B "decrease") with the: i. Discount rate? ii. Reserve requirement?
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