Question

A. Suppose there is a surge in consumer confidence that creates an increase in aggregate demand in the economy. The Federal Reserve estimates that a change in the money supply of $120 billion will adjust interest rates enough to offset the change in aggregate demand. If the reserve requirement is 25%, what action should the Fed take to reach the desired change in the money supply?
The Fed should conduct an (open market purchase / open market sale) of $______ billion.



b. Suppose there is a political crisis in Europe that causes a reduction in investment demand in the United States. To stimulate investment demand, the Federal Reserve decides the money supply needs to change by $150 billion. If the reserve requirement is 10%, what action should the Fed take to reach the desired change in the money supply?

The Fed should conduct an (open market purchase / open market sale) of $_____ billion.

Answer 1

Answer:

a. Open market sale of $30 billion

b. Open market purchase of $15 billion

Explanation: