Assume the following information for a hypothetical economy in year 1: money sup

Question

Assume the following information for a hypothetical economy in year 1: money supply = $800 billion; long-term annual growth of potential GDP =3 percent; velocity = 5. Assume that the banking system initially has no excess reserves and that the reserve requirement is 10 percent. Also suppose that velocity is constant and that the economy initially is operating at its full-employment real output.

a.What is the level of nominal GDP in year 1? $billion

b.Suppose the Fed adheres to a monetary rule through open-market operations. What amount of U.S. securities will it have to sell to, or buyfrom, banks or the public between years 1 and 2 to meet its monetary rule?

Instructions: Round your answer to one decimal place.

(Click to select)BuySell$billion

Explanation / Answer

a. nominal GDP in year 1= 800*5=$4000 billion

b. money supply in year 2 = 4000*1.03/5= 824 billion

buy =24 billion

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