Scenario 13.2?Assume the following conditions hold.
Now the Federal Reserve engages in an open market operation by purchasing $1 billion worth of government bonds from private bond dealers, who then deposit the $1 billion in the banks. This acts to lower the equilibrium interest rate by 2 percent.
a.At all banks, excess reserves are zero.
b.The deposit expansion multiplier is 3.
c.The spending multiplier is 5.
d.The initial equilibrium level of national income is $500 billion.
e.The initial equilibrium interest rate equals 6 percent.
f.The investment spending function is as illustrated in the figure below.

-Refer to Scenario 13.1. What is the ultimate change in the money supply following the open market operation by the Fed?
A) −$3 billion
B) −$0.33 billion
C) +$1 billion
D) +$2.01 billion
E) +$5.2 billion

Question

Scenario 13.2?Assume the following conditions hold.
Now the Federal Reserve engages in an open market operation by purchasing $1 billion worth of government bonds from private bond dealers, who then deposit the $1 billion in the banks. This acts to lower the equilibrium interest rate by 2 percent.
a.At all banks, excess reserves are zero.
b.The deposit expansion multiplier is 3.
c.The spending multiplier is 5.
d.The initial equilibrium level of national income is $500 billion.
e.The initial equilibrium interest rate equals 6 percent.
f.The investment spending function is as illustrated in the figure below.
 
-Refer to Scenario 13.1. What is the ultimate change in the money supply following the open market operation by the Fed?
A) −$3 billion 
B) −$0.33 billion 
C) +$1 billion 
D) +$2.01 billion 
E) +$5.2 billion

Quizplus · Accepted Answer

The ultimate change in the money supply following an open market operation by the Fed depends on the money multiplier effect. Assuming a money multiplier of approximately 2 (given typical reserve requirements), an initial injection (or removal) of funds by the Fed is amplified. Without the specific details from Scenario 13.1, the general principle is that if the Fed were to, for example, purchase $1 billion in securities, this could potentially increase the money supply by about $2 billion, assuming banks lend out the maximum allowable based on their reserves. Hence, an answer suggesting a significant increase like +$2.01 billion aligns with the expected outcome of an expansionary open market operation.

Scenario 13.2?Assume the Following Conditions Hold