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II Conceptual 4. Federal Reserves policy tools and its impact on money supply: Given the policy action in column 1, identify the correct tool from column 2 and the impact in column 3. Fill in the blanks below using number (column 2) and lower case letters (column 3). Answers: A - B - C - D - E - Policy Actions Tools Impact A Fed raised its loan rate 1 OMO B Fed lowered required rate on re- 2 Discount rate a Money supply decreases serves 3 Quantitative Easing C Fed hikes interest rate on reserves b Money supply increases 4 Required Reserve ratio D Purchase of bonds c No impact on Money supply 5 Interest rate on re- E Fed purchases mortgage securities serves 5. Briefly explain the fiscal multiplier. III Numerical 6. Assume the total money in the system is $5 trillion and the real GDP is $10 trillion with the price level of 2. Calculate the velocity of money of this economy. [Show all your steps] 7. If the required reserve ratio is 25% and the there is an increase in deposit by $20 million, compute the impact on money supply