Refer to Scenario 13.1.What is the change in investment spending following the open market operation by the Fed?
A)-$20 billion
B)-$10 billion
C)+$20 billion
D)+$30 billion
E)+$50 billion

Question

Quizplus · Accepted Answer

The open market operation by the Fed increased the level of reserves in the banking system by $20 billion. As a result, the money supply increased by $100 billion due to the money multiplier effect (5 x $20 billion = $100 billion). Given the fixed interest rates, the increase in the money supply will lead to an increase in investment spending by an amount equal to the increase in the money supply. Therefore, investment spending will increase by $20 billion.