Suppose that the U.S economy is in a recession and the Federal Reserve decides to use monetary policy to help the economy recover. The goal is to increase the real GDP by $500 billion. The Federal Reserve chooses open-market operations as the desired tool to achieve this. It has the following information about the economy: (1) all money is held as deposits and banks do not hold excess reserves; (2) a $1 dollar change in money supply leads to a $2 change in real GDP; and (3) the reserve requirement on banks is 10 percent. Given this information, answer the following questions:
a. What is the value of open-market operations that the Federal Reserve must carry out to help the economy recover from the recession? Should it buy or sell Treasury securities to achieve this?
b. Show the impact of the open-market operations on the money market graph.
c. Explain the logic behind how the open-market operations can help the economy recover.

Question

Quizplus · Accepted Answer

The Answer of Suppose that the U.S economy is in a recession and the Federal Reserve decides to use monetary policy to help the economy recover. The goal is to increase the real GDP by $500 billion. The Federal Reserve chooses open-market operations as the desired tool to achieve this. It has the following information about the economy: (1) all money is held as deposits and banks do not hold excess reserves; (2) a $1 dollar change in money supply leads to a $2 change in real GDP; and (3) the reserve requirement on banks is 10 percent. Given this information, answer the following questions:
a. What is the value of open-market operations that the Federal Reserve must carry out to help the economy recover from the recession? Should it buy or sell Treasury securities to achieve this?
b. Show the impact of the open-market operations on the money market graph.
c. Explain the logic behind how the open-market operations can help the economy recover.

Suppose That the U