Assume that the following conditions exist: a. All banks are fully loaned up- th

Question

Assume that the following conditions exist: a. All banks are fully loaned up- there are no excess reserves, and desired excess reserves are always zero. b. The money multiplier is 4 c. The planned investment schedule is such that at a 4 percent rate of interest, Investment $1450 billion. At 5 percent, investment is $1440 billion. d. The investment multiplier is 4 e. The initial equilibrium level of real GDP is $14 trillion. t. The equilibrium rate of interest is 4 percent Now the Fed engages in contractionary monetary policy. It sells $1 billion worth of bonds, which reduces the honey supply, which in turn raises the market rate of interest by 1 percentage point. Calculate the decrease in money supply after FED's sale of bonds: S bilion. Equilibrium GDP decreases by: S. billion. Calculate the new equilibrium level of real GDP: s tillin. (Round your answer to two decimal places)

Explanation / Answer

Money multiplier is 4 so a sale of bonds will reduce money supply by multiplier times which is 4 x 1 = $4 billion

This increases the interest rate to 5% and investment increases by $10 billion. Now equilibrium GDP reduces by multiplier times which is 4 x 10 = $40 billion

New GDP = 14.000 trillion - 0.004 trillion = 13.96 Trillion

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