Answer is complete but not entirely correct. Suppose the Federal Reserve decided to sell $25 billion worth of government securities in the open market a By how much will M1 change initially if the entire $25 billion is withdrawn from transactions accounts? Note: If M1 decreases be sure to include a negative sign (-) in front of your answer $ -25 M1 will initially change by billion b. How will the lending capacity of the banking system be affected if the reserve requirement is 5 percent? Note: If lending capacity decreases be sure to include a negative sign (-) in front of your answer Total lending capacity will change by $-500 billion c. How will banks induce investors to respond to this change in lending capacity? If the money supply increases, interest rates will decrease and investors will want to borrow more funds If the money supply decreases, interest rates will increase and investors will want to borrow fewer funds