Question
Suppose the Federal Reserve decided to purchase $20 billion worth of government securities in the open market. (a) By how much will M1 change initially?
Suppose the Federal Reserve decided to purchase $20 billion worth of government securities in the open market. (a) By how much will M1 change initially? Assuming that the sellers of the securities hold the proceeds as cash or deposit them in a transactions account, M1 will (increase/decrease) by $____billion. (b) How will the lending capacity of the banking system be affected through multiple rounds of lending if the reserve requirement is 10 percent? Lending capacity will (increase/decrease) by $ ___billion. (c) How will banks induce investors to utilize this expanded lending capacity? As the money supply increases, interest rates (increase/decrease/stay the same) and investors will want to borrow (less/more/the same) funds.
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