1. Assume the Federal Reserve increases the money supply.
Identify an open market operation they might use to increase the money supply.
Explain how an increase in the money supply will affect nominal and real interest
...
1. Assume the Federal Reserve increases the money supply.
Identify an open market operation they might use to increase the money supply.
Explain how an increase in the money supply will affect nominal and real interest rates.
Explain how the change in interest rates caused by an increase in the money supply will impact each
of the determinants of aggregate demand (C, I, G, Xn).
1. An open
market
operation that
the Federal
Reserve might
use to increase
the money
supply is to buy
bonds.
2. An increase
in money
supply will
reduce the
nominal and
real interest
rates as the
inflation due to
the influx of
money reduces
demand.
3. Lower
interest rates
due to the
increase in
money supply
will increase
consumer
spending sine
they have more
money due to
the lower
interests. A
decrease in
interest rates
also lowers the
cost ofborrowing,
which allows
businesses to
increase
Investment
spending. Since
the cost of
borrowing is
low,
government
spending also
increases, as
they can
borrow more to
spend on big
projects. Net
exports also
increase as low
interest rates
lead to a
depreciation of
currency. This
allows foreign
currencies to
appreciate,
which allows
them to buy
more American
goods.
2. If you transfer $100 from your piggy bank to your savings account
M1 decreases by $100.
M2 increases by $100.
M1 decreases by $100 and M2 increases by $100.
M2 decreases by $100 and M1 increases by $100
[Show More]
.png)
