Business > QUESTIONS & ANSWERS > Florida Virtual High School - AP MACROEC AP MACROMod 6 (All)

Florida Virtual High School - AP MACROEC AP MACROMod 6

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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 nomin ... al 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]

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