Answer is complete but not entirely correct. Suppose the Federal Reserve decided to buy $20 billion worth of government securities in the open market a. By how much will M1 change initially if the entire $20 billion is deposited into transactions accounts? Note: If M1 decreases be sure to include a negative sign (1) in front of your answer. M1 will initially change by IS 20 billion b. How will the lending capacity of the banking system be affected if the reserve requirement is 10 percent? Note if lending capacity decreases be sure to include a negative sign (-) in front of your answer Total lending capacity will change by 200 bilion c. How will banks induce investors to respond to this change in lending capacity? If the money supply increases interest rates decrease and investors will want to borrow more will funds If the money supply decreases, interest rates Increase and investors will want to borrow fewer will funds