Suppose the federal reserve decided to buy $35billion worth of government securities in the open market.

Week 8: Homework Saved 6 Suppose the Federal Reserve decided to buy $35 billion worth of government securities in the open market. 5 a. By how much will M1 change initially if the entire $35 billion is deposited into transactions accounts? points Note: If M1 decreases be sure to include a negative sign (-) in front of your answer. M1 will initially change by: billion eBook 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. Ask Total lending capacity will change by: billion c. How will banks induce investors to respond to this change in lending capacity? Print 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. References